When it comes to business ownership, it is essential to have a plan in place for the unforeseen circumstances that may arise. Two common options for structuring this plan are through a buy-sell agreement or a cross-purchase agreement.
A buy-sell agreement is an agreement between co-owners of a business that outlines what happens in the event that one owner wants to sell their share, passes away, becomes disabled, or retires. This agreement specifies who can buy the departing owner`s share and at what price. It is typically funded through life insurance policies or other financial instruments.
On the other hand, a cross-purchase agreement is an agreement between co-owners of a business that allows each owner to purchase the other owner`s share in the event of death, disability, or retirement. Unlike a buy-sell agreement, a cross-purchase agreement is typically funded through personal funds and not through life insurance policies.
Both buy-sell and cross-purchase agreements have their advantages and disadvantages. A buy-sell agreement can provide more flexibility since it can be funded through various financial instruments. It also minimizes the chance of conflict among co-owners since the agreement specifies the terms of the sale.
However, a buy-sell agreement can be expensive to set up and maintain since it requires regular valuations of the business and life insurance premiums. It can also limit the options for new owners since the agreement dictates who can purchase the departing owner`s shares.
A cross-purchase agreement, on the other hand, is cost-effective since it does not require life insurance premiums or business valuations. It also allows for more control over who becomes a new owner since the remaining owners can decide individually if they want to purchase the departing owner`s shares.
However, a cross-purchase agreement can be cumbersome if the business has many owners since each owner would need to purchase a portion of the departing owner`s shares. It can also be complicated to finance if one owner wants to sell their shares to multiple co-owners.
In conclusion, both buy-sell and cross-purchase agreements have their strengths and weaknesses. It is essential to evaluate the specific needs of your business and the goals of co-owners to decide which option is the best fit. Regardless of which option you choose, having a plan in place for unexpected events can provide peace of mind and ensure the continuity of the business.