Redemption Agreements are valuable tools in business succession planning for closely held companies. These types of agreements allow the owners of a company to determine in advance the terms of purchasing or transferring ownership interests in the event that one of the owner departs the company.
Redemption agreements are agreements between the owners and the company, where the company itself is obligated to redeem the ownership interest of the departing owner. On the other hand, a Sale of ownership interest agreement typically provides that a departing owner is required to sell, or offer to sell, his or her ownership interest to the remaining owners. Likewise, a Transfer or ownership interest agreement generally provides that a departing owner must transfer his or her ownership interest to designated individuals or entities.
Redemption Agreements generally address who can purchase or redeem the departing owner’s interest and the price, or method to determine the price, of such interest. Additionally, these contracts also outline the events that would trigger the redemption, sale, or transfer of ownership interest agreement. Accordingly, these agreements are advantageous in closely held businesses because they allow the owners to create a succession plan for departing owners, and to maintain continuity of the business, before any issues arise.
Carefully drafted Redemption Agreements can guard the remaining members from being burdened with untested or unknown successors, and can minimize the potential for disputes and stress among the co-owners caused by the uncertainty of a departing owner. However, these type of agreements should be periodically reviewed for feasibility – for example, to ensure that the company has sufficient funding to redeem the shares – and also for practicality, to confirm that the terms and conditions still meet the owners’ and company’s needs and objectives.
For more information on Redemption Agreements, please contact Antonoplos & Associates at 202-803-5676 or on the web at www.Antonlegal.com.