Using a buy/sell agreement to transfer ownership.

• Author: Ellentuck, Albert B.

A BUY/SELL agreement is a contract that restricts business owners from freely transferring their ownership interests in the business. Such agreements are a tool in providing for a planned and orderly transfer of a business interest. Some of the more important advantages of a buy/sell agreement are to:

1. Provide for business continuity upon the death, disability, or retirement of one of the shareholders;

2. Establish a market for the corporation's stock that might otherwise be difficult to sell;

3. Ensure that the ownership of the business remains with individuals selected by the owners or remains closely held;

4. Provide liquidity to the estate of a deceased shareholder to pay estate taxes and costs; and

5. Support the family of a deceased shareholder with the proceeds of the sale.

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   One of thedisadvantages to a buy/ sell agreement is that the cash paid for premium payments on life insurance that fund the buy/sell agreement is not available for business operations and shareholders' personal expenses. Also, circumstances may change after the buy/ sell agreement is adopted that cause purchasers to regret the obligation to buy a withdrawing owner's interests.

   In the context of a closely held corporation, a buy/sell agreement is a contract between the shareholders or between the shareholders and the corporation. The contract provides that a shareholder's stock will be sold (or at least offered for sale) to the other shareholders or to the corporation upon the occurrence of a specified event. Such events usually include death, disability, and retirement, but may also include such circumstances as divorce, bankruptcy, or inability to practice one's profession. The agreements may also be designed as a right of first refusal in the event one or more of the shareholders wish to sell their stock.

   Redemption Agreements

   In a redemption agreement, the shareholder and the corporation enter into a contract in which the shareholder agrees to sell his or her shares to the corporation according to the price, terms, and circumstances specified in the contract. Redemption agreements typically grant the corporation the right of first refusal if there is an offer from a third party to purchase the interest.

   Many closely held corporations have stock buy/sell agreements for valuing and purchasing the shares of a deceased or disabled shareholder or a shareholder whose employment with the corporation is terminating. When more than two shareholders arc involved, and particularly when life or disability insurance is used to fund the agreement, these buyouts are often structured as...