7 Essential Types of Buy and Sell Agreement Example Structures

Understanding Buy and Sell Agreements

A buy and sell agreement is a legally binding contract that outlines how a business ownership interest may be transferred upon a triggering event. These events often include death, disability, retirement, divorce, or voluntary exit.

For business owners, understanding different buy and sell agreement structures may support more informed succession and continuity planning. Each structure carries distinct legal, tax, and operational considerations.

1. Cross-Purchase Agreement

Under a cross-purchase agreement, the remaining owners agree to purchase the departing owner’s interest directly.

Key Characteristics

• Each owner holds insurance policies (if used for funding) on the other owners.

• The purchasing owners receive a cost basis increase in the acquired shares.

• Administrative complexity increases as the number of owners grows.

This structure is often evaluated in smaller ownership groups.

2. Entity-Purchase (Redemption) Agreement

In an entity-purchase agreement, the business entity itself repurchases the departing owner’s interest.

Key Characteristics

• The company owns and pays for funding mechanisms such as insurance.

• Administrative structure may be simpler than cross-purchase arrangements.

• Remaining owners typically do not receive a cost basis adjustment.

This structure is commonly used when ownership groups are larger.

3. Hybrid (Wait-and-See) Agreement

A hybrid agreement combines elements of both cross-purchase and entity-purchase structures.

Key Characteristics

• The company has the first option to purchase the departing interest.

• If the company declines, remaining owners may purchase the shares.

• Offers flexibility at the time of the triggering event.

This approach may provide adaptability, depending on business circumstances.

4. One-Way Buy-Sell Agreement

A one-way agreement typically applies in situations involving a sole owner.

Key Characteristics

• An individual owner agrees that their interest will be sold to a designated buyer upon death or disability.

• Often funded with life or disability insurance.

This structure may be used in family-owned businesses or closely held companies preparing for succession.

5. Stock Redemption Plan

A stock redemption plan is similar to an entity-purchase agreement but may be structured with specific corporate formalities.

Key Characteristics

• The corporation redeems shares from a departing shareholder.

• Share ownership among remaining shareholders adjusts proportionally.

This structure is commonly evaluated in corporations rather than partnerships or LLCs.

6. Installment Buy-Out Agreement

An installment agreement allows the purchase price to be paid over time.

Key Characteristics

• Payments may be structured with interest.

• Reduces immediate cash burden on the company or remaining owners.

• Introduces credit risk if payments extend over multiple years.

This approach may be used when liquidity is limited.

7. Trigger-Specific Agreements

Some buy and sell agreements are customized to address specific triggering events separately.

Examples

• Different valuation methods for retirement vs. death

• Distinct funding mechanisms depending on event type

• Restrictions related to divorce or bankruptcy

Custom structures may provide precision but require careful drafting.

Valuation Considerations

Regardless of structure, clearly defining valuation methodology is essential.

Common approaches include:

• Fixed price updated periodically

• Formula-based valuation tied to financial metrics

• Independent third-party appraisal

Advance agreement on valuation methods may reduce disputes during ownership transitions.

Funding Mechanisms

An agreement is only effective if supported by a realistic funding plan.

Common funding methods include:

• Life insurance

• Disability insurance

• Cash reserves

• Bank financing

• Seller financing arrangements

Funding should align with the size of ownership interests and the company’s financial capacity.

Coordination With Broader Planning

Buy and sell agreements are often integrated with:

• Estate planning

• Business succession planning

• Tax strategy coordination

• Liquidity management

Periodic review may help ensure the agreement reflects current ownership structure, business value, and tax law.

Conclusion

Buy and sell agreements serve as structured frameworks for ownership transitions in closely held businesses. Understanding the various structural options—including cross-purchase, entity-purchase, hybrid, and installment arrangements—may help business owners align succession planning with operational continuity goals.

Because these agreements involve legal and tax implications, collaboration with qualified professionals is typically appropriate.

Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners, Ltd. and Parkview Partners Capital Management are separate entities. Neither Stratos nor Parkview Partners Capital Management provides legal or tax advice. Please consult legal or tax professionals for specific information regarding your individual situation. Please consult with your professional advisors before taking any action. Past performance is not a guarantee of future results.