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Entity Purchase (Stock Redemption)

In an entity purchase the business is the buyer of the departing owner’s business interest. (In the case of a corporation, the entity purchase is called a stock redemption.) An entity purchase is relatively simple. It’s the business’ obligation to make the purchase and the funding is coordinated through the business.

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Cross Purchase

This is an agreement between you and your co-owners. The business, as an entity, will not play a role in the buyout. At the time of triggering event, the surviving owner(s) will purchase the business interest of the departing owner.

The funding vehicle for a cross purchase sits outside of the business – therefore those funds should not be subject to business creditors.

In a major difference from the entity purchase, the basis of the remaining owner will be increased as the surviving owner(s) have personally purchased the departing owner(s) interest. Why is this important? With an increase in basis, future sales of the business interest could result in a smaller taxable gain.

Wait and see Buy Sell

This is a hybrid agreement that mixes the entity purchase and the cross purchase. The arrangement is really just a series of purchase options. Generally, the business will have the first option to purchase the interest of a departing owner. If the business declines, the other owners will have the option to purchase the business interest. (There may be additional options – the attorney drafting the document will advise you as to the most practical option plan.)

What are the benefits of a wait and see Buy Sell

This arrangement allows the parties to the agreement to delay making a final decision on how the buy sell will be structured until the triggering event actually occurs (hence, the “wait and see” title). When the triggering event occurs, the circumstances of the remaining owners and the business will be known and the surviving owner(s) will be able to decide the best way to structure the actual purchase. In either case, the departing owner will receive the specified price.

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One Way Buy Out

This is an agreement that is used when the buyer of the interest is a third party or key employee who doesn’t currently have an existing ownership interest. Under the agreement the buyer is legally obligated to purchase the owner’s business interest at the triggering event. A one way agreement is generally used for business’ that are owned 100% by one individual.

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