Legal Blog

The Weekly Scenario from Steve Shane – 6.24.13

Question:  I am going into a venture with a partner and I understand that I should have a buy-sell agreement?  What is that and what types of agreements are there? Answer:  It is generally a good idea to have a written agreement among the owners of a business in which each owner agrees that upon the occurrence of a specified event (for example, death or separation from the business), their shares (or partnership interests) of the company will be sold to the surviving owner at a specified price and that each owner commits to buy the shares of their departing co-owner on the occurrence of such event. The two types of agreements are: 1. The Cross Purchase Agreement:  This agreement allows the remaining co-owners to purchase the interest of a departing owner.  For the death of one owner, the other owner generally acquires a life insurance policy on the life of the other owner and the death benefits received are required to be used to purchase the deceased owner’s interest. 2. Entity or Redemption Agreement:  An entity purchase agreement requires the business to purchase the interest of a departing owner. After the purchase, the remaining owners would be the only owners of the entity.  The funding of the purchase could also come from a life insurance policy purchased by the business. A third type of agreement – the hybrid agreement is a cross between the two and is probably the most flexible in that it provides the remaining owners and the business itself to purchase the interest of the departing owner.  With the hybrid agreement, generally the individual owner has the right to acquire the interest, but not any mandatory obligation.  Then if the owner(s) decline, the business would be obligated to acquire the interest of the departing business owner. Comment: A buy-sell agreement provides a number of important benefits.  We recommend that businesses with multiple owners have a buy-sell agreement in place. If you died while owning the business, a buy-sell agreement can guarantee your heirs a buyer and a pre-determined price.  A buy-sell agreement negotiated at arm’s length provides a valuation that can generally be relied on for gift and estate tax purposes. Steven E. Shane Principal Offit│Kurman Attorneys At Law 301.575.0313 Washington 443.738.1513 Baltimore 410.218.9339 Mobile 301.575.0335 Facsimile Please note the above material discussed is intended to provide only general information. Do not, under any circumstances, solely rely on this information as legal advice. Legal matters are often complicated. For assistance with your specific legal problem or inquiry please contact me directly.