Arizona Life and Health Practice Exam

Which type of buy-sell agreement is most suitable for businesses with a limited number of partners?

1. Entity Purchase Agreement

2. Cross-Purchase Agreement

3. Stock Redemption Agreement

4. Agreed Value Agreement

The correct answer is: Cross-Purchase Agreement

The most suitable type of buy-sell agreement for businesses with a limited number of partners is the Cross-Purchase Agreement. In a Cross-Purchase Agreement, each partner agrees to purchase a deceased partner's share of the business, which allows for a smooth transition and continuity in the business operations. This arrangement is beneficial because it allows partners to have direct control over who will step into their role after a partner exits or passes away. In businesses with a limited number of partners, this option simplifies the process of transferring ownership since each partner deals directly with the others. This direct relationship can enhance trust and ensure that the new owners are individuals who are already familiar with the business and its operations. Other types of agreements, such as the Entity Purchase Agreement or Stock Redemption Agreement, may be more complex or cumbersome in smaller group settings, as they involve the entity itself buying back interests or shares, which is less personal and can be administratively burdensome depending on the business structure. The Agreed Value Agreement is relevant in determining the value of the business for the buy-sell transaction but does not specify the method of transfer as effectively as the Cross-Purchase Agreement does.