The owners want to ensure a ready market for their ownership interests (in the event of death, disability, retirement, etc.). A mandatory buyout provision provides liquidity to the family of a deceased or disabled owner
Elimination of Uncertainty about Ownership Transfers:
Co-owners may be comfortable with a fellow owner’s plans to transfer ownership-for example, to a well-regarded son in the event of death or disability. However, a buy/sell agreement between the parent and the son (with an option on the part of the remaining owners to buy the interest if the son does not) removes the uncertainty that exists if a will or other document is being relied upon to effectuate the transfer. Wills can be changed at the last minute or challenged by heirs or potential heirs. A binding buy/sell agreement can solidify in writing the rights and obligations of the various parties.
Future Ownership Conflicts Can Be Foreseen:
If it is anticipated that the remaining owner (or owners) would have difficulties coexisting with the family of a deceased or withdrawing co-owner (such as a spouse, son, or daughter who would inherit an interest), a buy/sell agreement can ensure that the remaining owners gain control over the interest of the deceased or withdrawing owner. Owners and their advisers should not overlook the possibility that a former spouse could wind up with an ownership interest in a divorce settlement.
Keep Outside Owners Away:
This factor is most commonly present in closely held family businesses, but it can arise in any closely held business when the existing owners are a tightknit group. It is worth noting that in the event of insolvency of an owner, a creditor may become a member of the ownership group. A buy/sell agreement ensures that ownership interests cannot fall outside the existing group without the group’s approval.
Heirs of Owners Are Uninterested in Ownership:
This factor can arise because the heirs feel the business is too risky for their tastes or because they have no desire to participate.
Valuation for Estate Tax Purposes:
When owners are interested in establishing the value of their ownership interests for federal and state estate tax purposes, a buy/sell agreement can be used if certain requirements are met.
Ownership by Nonparticipants Is Not Desirable:
While a key person may be acceptable as a shareholder, ownership by a spouse or other beneficiary of the key person may not be acceptable.
Assure Affordability and Certainty of Ownership Transfers:
A buy/sell agreement can set out terms that assure affordability for purchases of ownership interests. A redemption agreement that is not funded by insurance can, for example, provide for an installment payout to preserve cash flow that is essential for the ongoing success of the business. When life insurance is used to fund a buyout, a buy/sell agreement is essential to tie the receipt of the insurance proceeds to the obligation to pay those proceeds to the heirs of the decedent. It is particularly important for cross-purchase agreements involving several owners to obligate the surviving owners to use the insurance proceeds for the buyout.