A transfer method most appropriate to closely-held businesses, buy-sells enable you to safeguard your family's financial future and prepare your company to go on without you. If done well, buy-sells can bolster companies against all kinds of unforeseen events that could threaten their stability and perhaps survival: disability, divorce, death and plenty of events in between.
Buy-sell agreements generally fall within two categories: cross-purchase agreements and redemption or repurchase agreements. In a cross-purchase agreement, the remaining shareholders of a company are obligated to buy the departing (either by retirement, disability or death) shareholder's stock. The corporation itself as an entity is not a party to the agreement. Cross-purchase agreements enjoy certain tax advantages, in that proceeds from the sale of stock are treated as capital gains rather than as dividends. In addition, if you fund a cross-purchase agreement with life or disability insurance, creditors cannot attach the cash values of the insurance policies.
Redemption or repurchase agreements specify that the corporation, via agreements made between the company and the individual shareholders, is obligated to purchase the stock of the departing shareholder. The major advantage to this type of agreement is simplicity -- each shareholder deals with one entity, the corporation, rather than several other shareholders.
A third type of buy-sell involves the sale of interest to key parties, most often prized employees. For example, the owner of a New England construction company sold two employees four percent stakes. The sales agreement stipulated that in the event of his death, the estate of the deceased would sell his shares of stock back to the company at a fixed price.
Then one day the unexpected happened. The owner died in a car accident, and the two employees were thrust into the position of owners. They met with the family of the deceased to formalize the sale and then called a meeting of all company employees. The buy-sell ensured the continuity of the operation and provided staff, bankers, customers, suppliers and other interested parties with an important sense of security.
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