Learn how hybrid buy-sell agreements can help you plan for business succession and compare them to other types of buy-sell agreements.

Hybrid buy-sell agreements integrate elements of both cross-stakes and corporate buy-out structures. Their key advantage is flexibility, allowing shareholders to choose between personally buying out shares or using company funds depending on the financial position and tax advantages at the time of the transaction. Unlike traditional cross-stakes agreements, which require personal insurance, hybrid mechanisms reduce the need for high individual insurance. Compared to corporate agreements, the hybrid model reduces the risk of excessive concentration of shares in the hands of the company and possible liquidity problems, which is critical in an unstable market.

Last updated on Oct 8, 2024

How do hybrid buy-sell agreements compare to other types of buy-sell agreements?

A buy-sell agreement is a legal contract that determines how a business owner's share of the company will be transferred in the event of death, disability, retirement, or other triggering events. It can help protect the interests of the remaining owners, the departing owner, and the business itself. There are different types of buy-sell agreements, each with its own advantages and disadvantages. In this article, we will compare hybrid buy-sell agreements to other common types of buy-sell agreements, such as cross-purchase, redemption, and wait-and-see.

1 Cross-purchase agreement

A cross-purchase agreement is a type of buy-sell agreement where the remaining owners agree to buy the departing owner's share of the business. This can provide the departing owner with a fair market value for their interest and the remaining owners with an increased ownership stake. However, a cross-purchase agreement can also be complex and costly, especially if there are many owners involved. The remaining owners may need to obtain financing or use personal funds to buy the departing owner's share. They may also face tax implications, such as capital gains or income taxes, depending on how the transaction is structured.

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Hybrid buy-sell agreements integrate elements of both cross-stakes and corporate buy-out structures. Their key advantage is flexibility, allowing shareholders to choose between personally buying out shares or using company funds depending on the financial position and tax advantages at the time of the transaction. Unlike traditional cross-stakes agreements, which require personal insurance, hybrid mechanisms reduce the need for high individual insurance. Compared to corporate agreements, the hybrid model reduces the risk of excessive concentration of shares in the hands of the company and possible liquidity problems, which is critical in an unstable market.

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Reggie Young

Exit Advisor & Agency Founder | Forbes Council, M&A, Growth and Operations
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In a hybrid buy-sell agreement, blending elements of cross-purchase and entity-purchase can offer flexibility and tax efficiency. This structure allows the business itself to step in if individual owners face liquidity issues, mitigating financial strain. It can also optimize the tax impact, potentially lowering the overall tax burden through strategic allocations.

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2 Redemption agreement

A redemption agreement is a type of buy-sell agreement where the business itself agrees to buy the departing owner's share of the business. This can simplify the process and reduce the financial burden on the remaining owners. The business may also benefit from tax deductions for the purchase price. However, a redemption agreement can also have drawbacks, such as reducing the equity and cash flow of the business. The departing owner may also face unfavorable tax treatment, such as ordinary income taxes or alternative minimum taxes, depending on how the transaction is structured.

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Reggie Young

Exit Advisor & Agency Founder | Forbes Council, M&A, Growth and Operations
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Hybrid buy-sell agreements can offer a balanced approach, combining features of redemption and cross-purchase agreements. This hybrid structure allows the flexibility to allocate purchase responsibilities between the business and individual owners based on current liquidity and tax considerations. It can minimize cash flow disruptions while optimizing tax outcomes for both parties involved.

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3 Wait-and-see agreement

A wait-and-see agreement is a type of buy-sell agreement that combines elements of both cross-purchase and redemption agreements. It allows the parties to wait until a triggering event occurs and then decide who will buy the departing owner's share of the business. This can provide flexibility and adaptability to changing circumstances and preferences. However, a wait-and-see agreement can also create uncertainty and potential conflicts among the parties. It may also require more negotiations and documentation at the time of the triggering event.

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4 Hybrid agreement

A hybrid agreement is a type of buy-sell agreement that also combines elements of both cross-purchase and redemption agreements. However, unlike a wait-and-see agreement, it specifies in advance who will have the first option to buy the departing owner's share of the business. Typically, the remaining owners have the first option, followed by the business, and then by a third party. This can provide clarity and certainty to the parties, as well as balance their interests and objectives. A hybrid agreement can also offer tax benefits, such as stepped-up basis for the remaining owners and tax deductions for the business.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do hybrid buy-sell agreements compare to other types of buy-sell agreements?

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1 Cross-purchase agreement

2 Redemption agreement

3 Wait-and-see agreement

4 Hybrid agreement

5 Here’s what else to consider

Buy-sell Agreements

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