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					Who Needs a Buy–Sell
Agreement?


A    buy–sell agreement is an
     essential component of oper-
ating a business entity. In fact, it
                                                                                • Upon the death or disability of
                                                                                  the owner, there is an obligated
                                                                                  buyer for the business at a fixed
is a virtual necessity for a busi-                                                price or formula. In the absence
ness owner or a partner in a part-                                                of such an agreement, the es-
nership, especially if there are                                                  tate or the disabled owner may
multiple owners or partners.                                                      be forced to sell the business
What’s more, a buy–sell agree-                                                    at a bargain-basement price.
ment may be legally required                                                    • The buy–sell agreement pro-
under state law for closely held                                                  vides a smooth transfer of the
companies.                                                                        business in a manner agreed
                                                                                  upon by the owners in advance
In any event, having a buy–sell                                                   of the triggering event. This can
agreement in place is a sound             Having a buy–sell agreement is          help minimize disruptions to
business practice. It can help pro-       an essential part of planning           customers or clients while the
                                          for your future to protect your
tect your family’s interests should                                               business is in the process of
                                          interests.
you become disabled or die pre-                                                   recovering.
maturely, or choose to sell the                                                 • The proceeds from the sale of
business.                                                                         a deceased owner’s interest can
                                       owner’s business interest to the           go toward certain estate settle-
Buy–sell agreements are viable         business entity itself. Thus, the          ment expenses (e.g., estate
for all types of business entities,    ownership interest is effectively          taxes and administration
including S corporations and lim-      absorbed by the company or part-           costs). In addition, part of the
ited liability companies (LLCs).       nership.                                   proceeds may be available to
Although some variations exist,                                                   help pay the living expenses of
there are three basic types of         Hybrid Agreement – This                    the deceased owner’s family
buy–sell agreements:                   method combines the first two              members. If the owner is dis-
                                       types of buy–sell agreements.              abled, the proceeds may be
Cross-Purchase Agreement –             Generally, the departing owner is          available to pay all of the
With a cross-purchase agree-           initially required to offer his or her     family’s living expenses.
ment, a departing owner agrees         interest to the entity. If the en-       • The price established in the
to sell his or her business inter-     tity declines or is unable to make         buy–sell agreement may be
est to the remaining owners. Be-       the purchase, other owners have            used to provide a valuation for
cause this is the simplest form of     the ability to purchase the shares.        federal estate-tax purposes.
a buy–sell agreement, it may be        Note that a buy–sell agreement
suitable for a small business with     may also be constructed so that          State law may also have an im-
just two or three owners. How-         key employees are able to pur-           pact on the terms of the buy–sell
ever, a different type of agree-       chase the shares. For example,           agreement. This is not a do-it-
ment may be preferred for a busi-      this may be incorporated into a          yourself proposition, so be sure
ness with numerous owners.             hybrid agreement.                        to seek proper guidance.

Entity-Purchase Agreement –            There are several immediate ben-
Also called a “redemption agree-       efits available for using a buy–sell
ment,” this form of buy–sell           agreement. They include the fol-
agreement involves the sale of the     lowing:




                                                                                                      CALIBRE
                                                                                                       CPA G          ROUP
                                                                                                                 PLLC
                                                                                                       A member of KS International



      1850 K Street NW, Suite 1050 • Washington, DC 20006 • (202) 331-9880 phone • (202) 331-9890 fax
      20 North Wacker Drive, Suite 900 • Chicago, IL 60606 • (312) 920-9400 phone • (312) 920-9494 fax

				
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posted:12/8/2008
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