A cross purchase buy-sell agreement is a legal document that outlines the process by which co-owners of a business can buy or sell each other`s shares in the event that one owner dies, becomes disabled, or wishes to sell their stake in the business. This type of agreement is typically used by small, privately-held companies with two or more owners.
An example of a cross purchase buy-sell agreement might look something like this:
John and Jane are equal owners of ABC Company. They agree that if one of them dies, becomes disabled, or wishes to sell their shares in the company, the other owner has the right to purchase those shares at a predetermined price. The price will be determined by an independent appraisal of the business`s value.
If John dies, Jane has the option to purchase his shares at the predetermined price. If Jane becomes disabled, John has the option to purchase her shares at the predetermined price. If either owner wants to sell their shares, they must first offer them to the other owner at the predetermined price before offering them to anyone else.
In order to fund the purchase of the shares, the owners agree to purchase life insurance policies on each other`s lives, with the proceeds going towards buying out the deceased owner`s shares. They also agree to set aside a portion of the company`s profits to fund the purchase of shares in the event of a disability or voluntary sale.
This type of agreement ensures that there is a smooth transition of ownership in the event that one owner is no longer able or willing to participate in the business. It also helps to ensure that the remaining owner(s) are able to maintain control of the company and keep it running smoothly.
In order to ensure that the agreement is legally binding and enforceable, it is important to have it drafted by an attorney with experience in business law. It should also be reviewed and updated regularly to ensure that it remains relevant and effective. Overall, a cross purchase buy-sell agreement is an essential tool for any business with multiple owners, and can help to protect the interests of all parties involved.