Virtually every closely held business creates a Buy-Sell Agreement during the organizing process.  Buy-Sell Agreements protect prospective buyers and sellers of a corporation by restraining owners from transferring their shares, and maintaining a market for the estate of a stockholder who becomes deceased or disabled.  Corporations have many options when deciding upon a Buy-Sell Agreement:

• A Redemption Agreement is a contract between an owner and the corporation, under which the owner agrees to sell his or her interest in the corporation to the business itself in certain specified situations. 
• A Cross-Purchase Agreement is a contract between and among the owners, under which each owner agrees to offer his or her interest in the business for sale to the other owners in certain specified situations. 
• A Hybrid Agreement is a contract between an owner and the corporation, as well as between or among owners, under which each owner agrees to offer his or her interest in the corporation for sale to the business and to the other owners in certain specified situations.  In most Hybrid Agreements, the owner first offers his or her interest to the business, and only offers it to the other owners if the business declines to purchase it.   

When creating a Buy-Sell Agreement, businesses must decide upon triggering events, or the events that will trigger the purchase and sale of a shareholder’s stock under the agreement.  Common triggering events include death, disability, divorce, retirement or termination of employment and an offer to purchase the shareholder’s stock. 

Buy-Sell Agreements must contain provisions that dictate how owners will be compensated if they depart from the business.  Life insurance is often the preferred means of funding Buy-Sell Agreements because owners can make regular and affordable payments of premiums, and assure that a large cash sum will be available on the death of any owner.  However, complications can arise due to the age or health complications of one or more of the owners.  Also, insurance will not provide cash to fund a purchase in the event of disability, retirement or a third-party purchaser.  For these reasons, corporations may need to consider debt financing or carry back financing as a funding option.  When borrowing cash to buy out a departing owner, businesses must consider the interest rate, the term of the note and whether the note is secured or unsecured.  

Perhaps the most difficult decision to make when establishing a Buy-Sell Agreement is how to fix the stock value.  Corporations have many options, and should consider them carefully.  One option is to reevaluate and fix the stock price each year at the annual meeting.  Another option is to include a formula clause that can be used to determine the value.  And yet another option is to have an independent appraisal done at the time when one of the owners opts to sell his or her stock in the business.

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