The 4 types of buy-sell agreements

On Behalf of | Nov 21, 2022 | Business Formation & Planning

Buy-sell agreements are a critical tool for Oregon entrepreneurs and proprietors of all kinds. These agreements help to ensure that the business or businesses an owner worked so hard to build are properly transitioned when they are no longer able to run them due to retirement, disability, death or another life event. When looking into buy-sell agreements, it is important to pick the structure that will best align with one’s intentions for their business. The four structures for a buyout that are most common are: 

  • Traditional cross-purchase plan – This is a structure that works well in businesses with multiple partners. It specifies that the other co-owners will buy out an owner’s shares if he or she leaves the business or passes away. 
  • Entity redemption plan – This structure also involves a buyout, but in this case, the business itself buys the remaining shares. From there, the partners who are still in the business reorganize the share structures in order to make their ownership equal. 
  • One-way buy-sell plan – This is the structure that will be used if there is a specific individual, such as a child or spouse, whom the business owner intends to purchase the business if the owner leaves or pass away. 
  • Wait-and-see buy-sell plan – This structure is ideal when there is not a clear idea of who might want to take over the business. Here, the business itself will have the opportunity to buy the shares of an owner who is leaving or dies. If shares remain, other owners will have an opportunity to buy those shares. 

The structuring of buy-sell agreements is often discussed alongside other estate plans for business owners. For example, what funds will be available to help the family member who is to buy out the shares afford this? Other issues of business transition are good to talk about at this time, such as management considerations and legal obligations. An Oregon lawyer with experience in both business and estate law can be a helpful guide through structuring a buy-sell agreement and considering all the issues that may arise around it.