If you are fortunate enough to have a portfolio of readily marketable investments i.e., 401(k), IRA, individual or joint accounts consisting of stocks, bonds, and cash, you you have an easy way to determine its daily value by reviewing monthly statements. If you need liquidity, you have cash in your hands. In other words there is a market for your investments. Without the proper planning, your music retail store has no market, and the value is uncertain.
A properly funded buy-sell agreement provides departing owners with a market and a price for an asset that might otherwise be hard to sell. The agreement insures that each shareholder can sell his or her stock. Generally speaking there are three types of Buy-Sell agreements.
Cross Purchase– A cross purchase agreement is between the owners (shareholders). For example, upon certain triggering events such as death or disability, the agreement spells out the details how other owners will purchase the shares of the departing owner.
Equity Purchase or Stock Redemption- Equity purchase or stock redemption occurs when the business itself purchases stock from the exiting owner.
Wait and See Buy-Sell– Wait-and-see plans combine the redemption and cross purchase strategies as they first allow the other owners to purchase stock and then require the company to redeem the remaining shares. Although this technique may offer greater flexibility, the funding process is complicated because the company may not know how much stock each shareholder will purchase, therefore, it might over or underestimate the cost to buy the rest of the stock.
Source:The Principal Financial Group