Buy-sell agreements are used to help a business remain intact when one of the key members passes away or decides to leave the company. Some organizations have difficulty adjusting to a new leadership hierarchy due to disagreements or other issues. Connecticut business owners can avoid these growing pains by preparing for this possibility beforehand. Here are three structure suggestions to consider.
Cross purchase agreement
The founders of any company who intend to pass it on to their children or keep it alive decades down the road must put together an exit strategy for key members. One of the reasons why some companies fail is that they cannot survive changes in leadership.
A cross purchase agreement gives the company’s existing leadership an option to purchase the interest or shares of the member who has passed away or is exiting the company.
Stock redemption agreement
A stock redemption agreement gives a corporation the right to purchase the stock interest of the member who has passed away or is exiting the company. The shareholder is essentially bought out.
This agreement, as well as the others, is designed to protect the company. Sometimes a member has to exit because he or she becomes debilitated. Other times, there is a messy divorce. The goal is to reduce the risk that could negatively impact an organization.
A combination agreement is a hybrid of the cross purchase and stock redemption agreement. The other owners must purchase the interest of the member who has passed away or is exiting the company. This ensures that the interest of the organization remains within instead of going outside. Bringing in new owners or leaders into a company at this time is not always a good idea unless it specifically wants to restructure.
Buy-sell agreements are a form of succession planning. If the goal is to keep the company alive decades down the road, this is a vital document to prepare. To prepare the document, you are encouraged to speak with a professional who is experienced in this area as well as real estate law.