Cross Purchase Buy Sell Agreement: Everything You Need to Know
A cross purchase buy sell agreement facilitates the transfer of ownership interests of a company. 3 min read
2. How to Write a Cross Purchase Buy Sell Agreement
A cross purchase buy sell agreement facilitates the transfer of ownership interests of a company. When an owner of a business decides to retire, dies, or is otherwise incapacitated, this agreement will allow the remaining shareholders to purchase the owner's shares.
What is a Cross Purchase Buy Sell Agreement?
Cross purchase buy sell agreements have a variety of purposes. One of the main benefits of this document is that it allows the remaining partners in a business to purchase the shares of a partner who is leaving the company. In addition, this document will decide how these shares can be purchased or distributed. For instance, many cross purchase buy sell agreements require proportional distribution.
In essence, a cross purchase buy sell agreement is a contingency plan for when a partner leaves a business and their shares become available. The death of a partner is one of the primary triggers of a cross purchase buy sell agreement. These agreements can include a variety of protections. For example, one partner may buy life insurance policies for the others, and when a partner dies, the payout from the policy can be used to purchase their shares.
When a partner retires, this event can also trigger a cross purchase buy sell agreement. It's possible for these agreements to include a set price for buying out a retiring partner. This amount will need to be regularly updated. In other circumstances, the amount of the buyout can be calculated by an independent appraiser or by using a valuation formula.
In a business where the partners are around the same age, a cross purchase agreement can be very beneficial. However, in larger businesses with multiple partners, the need to purchase life insurance policies for each partner can result in problems.
For example, if there is a large age gap between partners, the younger partners will be required to pay more expensive life insurance premiums. In businesses with a large number of partners, it's possible to consolidate a cross purchase buy sell agreement with an individual trustee. This trustee would have several duties:
- Owning the partner's life insurance policies.
- Collecting the payout when a partner dies.
- Purchasing and distributing the deceased partner's shares.
How to Write a Cross Purchase Buy Sell Agreement
The best way for business partners to develop a cross purchase buy sell agreement is to hire a knowledgeable attorney. An attorney can help partners decide how the agreement can be formatted and can then write the agreement. While the agreement is being written, several possible events must be considered:
- Buyout events
- Valuation and funding
- Buy-sell variations
Virtually every cross purchase buy sell agreement will include a buyout provision that will be triggered upon the death of a business partner. However, several other possible buyout events must be kept in mind by partners. For example, if a partner gets divorced, it's possible that their shares will be given to their former spouse in the divorce settlement, which is a situation the other partners may wish to avoid.
Other buyout events that should be considered when writing a cross purchase buy sell agreement include a partner becoming disabled, a partner declaring bankruptcy, or the decision to fire a minority partner.
Valuation is another issue that can influence how a cross purchase buy sell agreement will be written. When writing the agreement, the partners will need to agree on their business's value. By agreeing upon a specific amount, partners will be able to prevent a future dispute when one partner decides to leave the business or a partner dies. Calculating an accurate value for the business can also make it easier to fund a buyout.
In a cross purchase buy sell agreement, valuation can be addressed multiple ways:
- Calculate the value based on a formula that will be added to the agreement.
- Require that partners valuate the business every year. If they don't complete this task, a formula in the agreement can be used.
- Choose a professional appraiser to calculate a business value.
Partners also have several options for funding a buyout:
- Use a conservative investment or a savings account to institute a sinking fund.
- The business can get a bank loan.
- If it is allowed in the cross purchase buy sell agreement, the buyout can be paid in installments.
- Disability and life insurance policies can be purchased for each owner.
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