Which statement regarding buy-sell agreements is NOT correct?

Which statement regarding buy-sell agreements is NOT correct?

• A. In an entity purchase buy-sell agreement, each owner agrees to purchase their proportionate share of any interest redeemed by the business entity from any other owner.
• B. In a cross-purchase buy-sell agreement, each owner agrees to sell his or her interest in the business to the other owners under certain stated conditions.
• C. None of these statements regarding buy-sell agreements are correct.
• D. In a buy-sell agreement, the actions of the purchasing owners can be made optional rather than mandatory.

Answer: (A)

The main idea is who actually buys the departing owner’s shares when a buy-sell is triggered. In an entity-purchase arrangement, the company itself is the buyer and purchases the departing owner’s stock, not the other owners buying their proportionate shares from that owner. So stating that each owner agrees to purchase their proportionate share of the interest redeemed by the business entity is not correct. By contrast, a cross-purchase setup has each surviving owner buy the departing owner’s shares directly from that owner (typically funded by life insurance). That description is accurate. The statement about optional rather than mandatory purchases is generally not how these agreements are treated at trigger time, where a sale is usually required to proceed.

The main idea is who actually buys the departing owner’s shares when a buy-sell is triggered. In an entity-purchase arrangement, the company itself is the buyer and purchases the departing owner’s stock, not the other owners buying their proportionate shares from that owner. So stating that each owner agrees to purchase their proportionate share of the interest redeemed by the business entity is not correct.

By contrast, a cross-purchase setup has each surviving owner buy the departing owner’s shares directly from that owner (typically funded by life insurance). That description is accurate. The statement about optional rather than mandatory purchases is generally not how these agreements are treated at trigger time, where a sale is usually required to proceed.