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Every business owner will eventually get out of the business. In the absence of a child or other relative who can take his or her place, an owner needs to plan for the sale of his or her ownership interest.
Ownership in a small business often has little market appeal to anyone other than those already involved in the business. Consequently, the obvious buyers are the remaining owners.
A buy-sell agreement guarantees a buyer for a retiring or deceased owners interest in a business, thereby allowing the owner (or the owners heirs) to recover his or her investment. The agreement also fosters the continuation of the business by not allowing the departing owners interest to fall into the hands of outsiders - persons who may not be qualified to run the business or who may be incompatible with the remaining owners
UNDER A TYPICAL AGREEMENT, THESE CONDITIONS APPLY:
* If an owner wishes to retire, he or she must first offer to sell the interest to his or her associates, or to the business itself, before selling to a third party.
* Upon the death of an owner, the surviving owners or the business must buy, and the estate must sell , his or her interest.
* The purchase price is fixed or the agreement contains a formula to determine the price.
STOCK REDEMPTION OR CROSS-PURCHASE:
Stockholders implementing a buy-sell arrangement must generally chose between a stock redemption plan and a cross-purchasing agreement. Under a stock redemption plan, the corporation agrees to redeem the shares of a stockholder at his or her retirement, death or, perhaps, disability. The redeemed shares become treasury stock. To fund the redemption, the corporation owns and is beneficiary of a life policy insuring each stockholder.
Under a cross-purchase agreement, the stockholders agree to purchase the share of a withdrawing or deceased stockholder. To fund the purchase, each stockholder owns and is beneficiary of a policy on the life of every other stockholder.
There are no fixed rules for determining which type of buy-sell agreement is most appropriate for stockholders' particular needs and objectives. However, each type of arrangement has advantages that the stockholders need to consider.
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