What is a Cross Purchase Buy Sell Agreement Anyway?

A cross purchase agreement is a form of buy-sell agreement, a legal contract between all the owners or partners of a closely held business. More rarely, a cross purchase agreement is referred to as a crisscross. Under the cross-purchase agreement, you and your co-owners agree to buy each other’s business interests under the terms and conditions articulated in the agreement. This creates a ‘ready market’ and guarantees a buyer for your business interest after a ‘triggering event’.

So here’s how it works: You are a business owner bound under a cross purchase buy-sell agreement and you die (triggering event), in which case the buyer named in the agreement is legally obligated to buy your interest in the business from your estate, and just as important, your estate is legally obligated to sell your interest to the buyer.

Once you are bound under a cross purchase agreement, you can’t transfer your share of the business to anyone except the buyer named in the agreement, remember we are dealing with ‘closely held companies’ not liquid publicly traded companies. Certain transfer exceptions may apply, but are normally limited to a spouse, trust, or another owner.

It is very common for the buy-sell agreement to combine the entity purchase and cross purchase options by providing a right of first refusal to either the entity or the other owners first, and then to the other. This basically gives ‘first dibs’ to the entity or other owners on the purchase of the business interest. Options and buy-sell customization can vary tremendously, so you should consult with an attorney for a description of all the possibilities before implementing an agreement.

What are ‘triggers’ all about?
As mentioned above, the buyer named in the agreement is obligated to purchase your interest in the business at the occurrence of some specified triggering event and your estate is obligated to sell your interest, your estate could be comprised of your family, spouse, or anyone else who is your heir.
Conversely, if the tables are turned in a cross-purchase buy sell agreement, you are obligated to buy all or part of a selling owner’s business interest after a triggering event. Furthermore, their estate is required to sell. You, your advisors, and possibly your attorney will determine the triggers appropriate for your business situation. Here’s some trigger examples:
  • Death
  • Long-Term Disability
  • Retirement
  • Divorce
  • Bankruptcy
  • Conviction of a crime
  • Loss of professional license
  • Termination
  • Withdrawal prior to retirement
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The complexity of cross-purchase buy sell agreements has no limits; customizations specific to each business should be considered under the advisement of an experienced attorney.
Partners or co-owners can fund the agreement with a sinking fund, buy the life insurance policies, or through borrowing or debt. Just like with other buy-sell agreement funding, if owners are relatively healthy, life insurance tends to be the best, most efficient way to leverage the funding of the agreement efficiently.
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