Buy-sell agreements are meant to address potential problems that may arise after a business organization by specifying the terms of the value of an economic interest is determined in the event of change in control, dissociation, expulsion, death, divorce, disability, or retirement. The buy-sell agreement is necessary in situations where a partnership, corporation or limited liability company seeks financing, loans, or leases. The buy-sell agreement generally will show lenders, purchasers or other third party that the business is stable, well organized, and has provisions in place accounting for possible future changes in circumstances.
There are two main structures for buy-sell agreements: (1) cross purchase agreements, where the remaining owners of a business buy the other partner’s, member’s or shareholder’s economic and business interest; (2) redemption agreements, where the company buy’s (or redeems) the other partner’s, member’s or shareholder’s economic and business interest. Life insurance policies are typically used to ensure that funds are available for cross-purchase and redemption transactions.