Buy-sell agreements are generally available in two flavors: buying an entity and cross-buying, each with pros and cons. A business purchase agreement binds the company to the purchase of shares from an outgoing owner, while a cross-purchase binds the remaining owners individually. The type of business unit (S-Corp, C-Corp, Partnership…) and the number of owners are important considerations in determining which is the best. Perhaps the owners should agree on a lower value, insure it and agree to purchase additional insurance (perhaps with company money) so that the family recognizes the highest amount at death. For example, two partners may decide that the value of a business should be $30,000,000 ($15,000,000 each), the amount they wish their families at death. There is no absolute value. Even a qualified business valuation would take into account a number of values. After consulting with consultants, they agreed to implement an agreement that sets the value at $20,000,000, which is also considered appropriate, and they insure it with $10,000,000 in life insurance for each of their lives. They each put $5,000,000 in insurance into an irrevocable life insurance fund, and the company also funds those premiums through bonuses, or perhaps a more creative agreement on dollar splitting. If carefully executed, the end result will be that each family will receive $15,000,000, as it would if the agreement was of such importance to the company, but that it included only $US 10,000,000 in the taxable reduction, which would save family tax at US$5,000,000 or about $2,500,000 in tax savings, taking into account federal and heir tax. The more owners there are, the more difficult a cross-purchase contract will be. Often, agreements are funded to trigger events such as death or disability by purchasing insurance. Once options are taken into account, insurance is usually the most cost-effective way to ensure that liquidity is available when needed.
A cross-purchase would require each homeowner to purchase insurance for all other homeowners. A company with six owners would require 30 directives. 4. Sales (drag along / Tag along rights): Sales contracts may include provisions that, where the majority of the company`s ownership shares wish to sell their ownership shares to a third party, the other owners are required (or have the right) to participate in this transaction. On the other hand, if the majority owners wish to sell to third parties, the minority stake must be sold at the same price and on the same terms as the majority shares. What was your experience? How did you manage the possibility of a disagreement with your partner? Do you have any precautions to protect yourself, to protect your property? Join us in the comments below.