By answering the questions from the two previous articles, you are forming the foundation for your own Buy Sell agreement. You now have a choice of SIX different types of Buy Sell plans. This may seem like a daunting task. However, when you work with an Attorney, an accountant and a certified financial planner a complete plan can be designed for your unique business. Let’s look at the six main forms of Buy Sell Programs. Do not feel overwhelmed by the terms because a brief description of each form will clarify each agreement.
ENTITY PURCHASE
CROSS PURCHASE
WAIT AND SEE BUY SELL
TRUSTEED BUY SELL
ONE WAY BUY SELL
SECTION 303 STOCK REDEMPTION
An Entity or Company Plan is nothing more that THE BUSINESS itself having the option of purchasing the interest of a departing owner in the business.
The Cross Purchase Program is one that gives REMAINING OWNERS the option to purchase a departing owners interests’ in the business.
The Wait and See is nothing more than a combination of the above two. B0TH the BUSINESS and EACH OWNER enter into an agreement to purchase a departing owners’ interests. Then at a triggering event, the decision is made to have EITHER the business OR the owners buy the departing owners’ interests.
The TRUSTEED Buy Sell Plan represents a different twist. In this document, A TRUST is drafted and a trustee handles the transcations of a departing shareholder.
The ONE WAY scenario is one in which an owner or owners of a business have an agreement with a key employee, a family member or even a competitor buy the interests of the current owner upon a triggering event.
Last, although not seen very often, is a SECTION 303 STOCK REDEMPTION. In this succession form, the IRS allows the owner of a business to redeem a certain percentage of a business owners’ interest without any dividend consequences.
Please remember that triggering events refer to a death, disability, retirement, bankruptcy, divorce or incapacity of one or more owners in the business. If confused, please call or email me at rfowler@americanportfolios.com. I am happy to clear any issues you may have.
Next we will spend the upcoming several articles in digging more deeply into each type of plan.