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What is a Buy-Sell Agreement?

A buy-sell agreement is a legally binding contract between co-owners of a business. It essentially conducts the affairs if you or your co-owner dies, becomes disabled, retires, is forced to leave the business or chooses to do so. The agreement requires that if one of the business owners is no longer a part of the business, that their share is sold to either the business or the remaining owners. If a co-owner is no longer a part of the business, you can use the funds from the buy-sell agreement to buy out your co-owner’s share in the business. A buy-sell agreement is a good idea for any type of business, no matter how small. It can solve any confusion in the event of a co-owner’s death. A buy-sell agreement’s benefit greatly outweighs the cost.

Cross-Purchase Agreement

A cross-purchase agreement is the most simple type of buy-sell agreement. It is a pre-decided agreement between business owners to sell the share to the remaining co-owner or co-owners. The payout may be fixed or determined by appraisal or formula and can be paid in cash or in installments over time.

Entity Purchase Agreement

An entity purchase agreement, sometimes called a redemption agreement, is similar to a cross-purchase, except that the business owner sells his share directly to the business. The ownership is then absorbed by the business. This allows the remaining business owners to keep from having to go out of pocket.

Buy-Sell Agreement Through Insurance

A buy-sell agreement can be funded through life insurance by co-owners taking policies out on each other. The life insurance policy gives you options and assures you that your business is still in good hands. If your co-owner dies first, life insurance can be used to buy out his or her share of the business.
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