A buy-sell agreement is an agreement between individuals, partners or shareholders in a New Jersey business that outlines the terms under which a business, company or corporation, or an interest in a business, company or corporation will be sold should one member leave due to retirement, disability, death, or voluntary or involuntary termination. These agreements typically establish a price for the business, provide the cash for funding, and guarantee a purchaser for the business interest. When properly crafted, buy-sell agreements can be crucial to successful business succession planning.
There are two main types of buy-sell agreements, although hybrid agreements do exist combining the main components of the two. A “redemption” buy-sell agreement states that upon termination or sale of a partner(s) or shareholder(s) interest, the corporation acquires the stock shares. In contrast, a “cross purchase” buy-sell agreement states that the other partner(s) or shareholder(s) will personally acquire the ownership interest of the terminating partner, with the corporation not involved.
There are many benefits to a buy-sell agreement. As previously mentioned, a purchaser for the business interest is guaranteed. This avoids the hassle of finding a buyer under duress. The agreement also assures the heirs of a deceased business owner a fair price and may establish the value of the business for estate tax purposes, meaning the fair market value will not have to be determined and therefore won’t be an issue among the buyer and seller. In addition, the agreement can provide for funding the purchase price, avoiding the trouble of going through unknown financing methods. A buy-sell agreement also guarantees continued ownership to any surviving partners/ shareholders and most importantly, assures the business will continue to operate without being interrupted due to any dispute about the business transfer.
While a buy-sell agreement can establish the value of the business for tax purposes, the government will only recognize such a value of the business if three strict requirements are met:
1. The buy-sell agreement must be a bonafide business agreement.
2. The buy-sell agreement must clearly not be a device that attempts to transfer business interests to family members for less than full and adequate consideration.
3. The terms of the buy-sell agreement must be comparable to similar arrangements entered into in by non-parties.
Creating a buy-sell agreement between you and your partners or other shareholders is crucial to business planning in New Jersey. This agreement, when properly written, can guarantee the successful transfer of your business interests with as little hassle as possible. If you would like information about the benefit of a buy-sell agreement or would like to discuss the planning of your business succession, please call Fredrick P. Niemann, Esq. toll-free at 732-863-9900 or email him at fniemann@hnlawfirm.com/ you’ll find him east to talk to and very knowledgeable and experienced in NJ business.