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Buy-Sell Agreements

A buy-sell agreement is an arrangement which provides that upon the occurrence of one or more specified events, a person or other entity is given the right or obligation to purchase assets or shares from another person or entity. One of the more common applications of a buy-sell agreement is to provide for the transfer of a business or partnership interest from one person to another. For example, two partners in business might enter into a buy-sell agreement wherein one partner agrees to purchase the other partner’s interest upon the latter partner’s retirement. Buy-Sell agreements can also be used among multiple owners of real estate to help ensure continuity of ownership in the event of divorce, death or other event specified in the agreement. Buy-Sell agreements usually include some type of restriction on the sale of the shares or interest, and, in addition to naming the intended buyer and seller, describe the event which will initiate or “trigger” the sale.

The restriction on the sale of shares is a valuable component of the buy-sell agreement and can keep a family business in the family as well as providing the partners or shareholders with the security of knowing that control cannot easily fall into the hands of unwanted or undesirable entities or individuals.  The buy-sell transaction is initiated by one or more “triggering” events set forth in the agreement. These triggering events might include the retirement, disability or death of a shareholder, or simply a shareholder’s indication of his/her desire to sell. The price to be paid for the interest is sometimes stated in the agreement, or if the future value cannot be determined, a formula or method to determine the value is predetermined and made part of the agreement. In certain circumstances, the methodology set forth in the buy-sell agreement may be able to establish the value of a closely held business for federal estate tax purposes.

A buy-sell agreement can be of particular value in a family-held business to provide for the orderly transfer of the business from one generation to the next. It can provide the selling shareholder with a ready market for shares, which might otherwise be difficult to sell. This can provide liquidity for the seller or the seller’s estate at a time when it may be needed. When considering a buy-sell agreement, it is important to consider how the transaction will be funded. If the triggering event is the retirement or the attainment of a certain age by the seller, planning should include setting up a sinking fund or some other method to ensure that the business entity or other shareholders are able to make the intended purchase. If the triggering event is disability or death, the buy-sell can be funded with life or disability insurance purchased for that purpose.

Buy-sell agreements can be structured to meet a wide variety of objectives. While they are more commonly used in a business setting, the ownership of almost any asset can be the subject of a buy-sell agreement. Examples might include an aircraft, yacht or vacation home owned by more than one person or family.  Regardless of how they are used, buy-sell agreements can protect the owners or shareholders from unintended consequences and provide for the orderly disposition of the asset or business when the time comes.

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