If you are buying a business that will include more than one co-owner, you need a buy-sell agreement—period.

You have multiple reasons to put a buy-sell agreement in place and not one reason not to have a buy-sell agreement.

A well-drafted agreement can do these valuable things for you:

  1. Transform your business ownership interest into a more liquid asset
  2. Prevent unwanted ownership changes
  3. Save taxes and avoid hassles with the IRS

Buy-sell agreements come in two basic flavors:

  • Cross-purchase agreements
  • Redemption agreements (sometimes called liquidation agreements)

When you enter into a cross-purchase agreement, it’s a contract between you and the other co-owners. Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the remaining co-owners when a triggering event occurs, such as death or disability.

When you enter into a redemption agreement, it’s a contract between the business entity itself and its co-owners (including you). Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the entity when a triggering event occurs.

Both types of agreements have three main goals.

Goal No. 1. Ensure that there will be a willing buyer for each co-owner’s interest when a triggering event occurs.

Goal No. 2. Restrict each co-owner from unilaterally transferring his or her ownership interest to someone outside the existing group.

Goal No. 3. Ensure favorable tax results for all concerned.