A cross-purchase buy-sell agreement is a legal contract that outlines how the ownership of a business will be transferred in the event that one or more of the owners die, become disabled, or retire. This type of agreement is important for business owners because it can help to ensure that the business continues to operate smoothly even in the event of a major change in ownership.

What is a cross-purchase buy-sell agreement?

A cross-purchase buy-sell agreement is a type of buy-sell agreement in which the remaining owners of a business agree to purchase the ownership interests of any owner who dies, becomes disabled, or retires. This type of agreement is often used by small businesses with a small number of owners.

How does a cross-purchase buy-sell agreement work?

A cross-purchase buy-sell agreement typically specifies the following:

The triggering event(s) that will cause the agreement to go into effect, such as death, disability, or retirement.
The purchase price of the ownership interests that will be transferred.
The method of payment for the ownership interests, such as cash, life insurance, or a combination of both.
The terms of the agreement, such as the length of time that the agreement will be in effect.

Why is a cross-purchase buy-sell agreement important for business owners?

There are a number of reasons why a cross-purchase buy-sell agreement is important for business owners. These include:

It can help to ensure the continuity of the business. If an owner dies, becomes disabled, or retires, the business can continue to operate smoothly by transferring the ownership interests to the remaining owners. This can help to avoid disruptions in the business and protect the interests of the employees, customers, and creditors.
It can help to avoid disputes among the owners. If an owner dies, becomes disabled, or retires, there may be disagreements among the remaining owners about who should purchase the ownership interests. A cross-purchase buy-sell agreement can help to avoid these disputes by specifying in advance who will purchase the ownership interests and how much they will pay.
It can provide tax benefits. In some cases, a cross-purchase buy-sell agreement can provide tax benefits for the owners. For example, the purchase of the ownership interests may be eligible for a step-up in basis, which can reduce the amount of capital gains tax that is owed.

Conclusion:

A cross-purchase buy-sell agreement is an important legal document for business owners. This type of agreement can help to ensure the continuity of the business, avoid disputes among the owners, and provide possible tax benefits. If you are a business owner, you should consider having a cross-purchase buy-sell agreement in place.

Additional thoughts:

In addition to the benefits mentioned above, a cross-purchase buy-sell agreement can also help to protect the value of the business. This is because the agreement will specify the purchase price of the ownership interests, which can help to ensure that the business is not sold for less than its fair market value.

Another benefit of a cross-purchase buy-sell agreement is that it can help to provide liquidity for the owners. This is because the owners will be able to sell their ownership interests to the remaining owners in the event of a triggering event. This can be especially important for owners who are nearing retirement or who need to raise cash for other purposes.

If you are a business owner, you should consult with an attorney to discuss whether a cross-purchase buy-sell agreement is right for you. An attorney can help you to understand the benefits and risks of this type of agreement and can help you to draft an agreement that meets your specific needs. Additionally, for any tax related questions, be sure to consult your CPA, or tax professional.