A buy-sell agreement can protect the continuity of your small business in several ways:

Creates a guaranteed market for the business interest.

Allows those who are interested in continuing the business to do so without interference from the deceased owner’s heirs.

Provides liquidity for the estate of the deceased owner by turning the business interest into cash.

May help establish the value of the business for federal estate tax purposes.

Types of Buy-Sell Agreements

A buy-sell agreement may be structured in one of three ways. You should seek the advice of your legal and tax advisors to determine which is the best for you.

Cross Purchase: This type of agreement involves the business owners (shareholders or partners) entering into an agreement among themselves whereby the surviving owners are obligated to buy the interest of the deceased owner, and the estate of the deceased owner is obligated to sell.

Entity: This type of agreement binds the business itself to buy the interest of the deceased owner, and the estate of the deceased owner is obligated to sell. 

If the business is the corporation, this entity agreement is sometimes referred to as a stock redemption agreement.

Wait and See: If it seems difficult to decide whether to use cross purchase or entity, a “Wait and See” may be utilized. 

This type of agreement allows flexibility in that it is not decided until the owner’s death whether the surviving owners or the business purchases the interest of the deceased owner.