12 Aug Buy/Sell Agreement
Buy/Sell Agreement… every business partnership needs one.
What is a Buy/Sell Agreement?
A buy sell agreement is a document drafted by your legal professional that determines how the assets of the outgoing partner is dealt with. For example, if your business partner were to pass away how would their share in the business be dealt with?
The questions you need to ask
The agreement can be written around specific events occurring such as death, divorce, total and permanent disablement, retirement or bankruptcy. Should the unthinkable occur would you be covered? There are two types of agreements – Cross purchase and Corporate entity redemption.
Cross Purchase Agreements – This arrangement is where the surviving business partner is required to purchase the share in the business off the estate of the deceased. Would you, as the surviving business partner have the funds to buy them out?
Corporate Entity Redemption – Under this arrangement the company agrees to purchase the share in the business and cancel the shares. The estate of the deceased receives this money and distributes according to the will. Do you have a properly drafted insurance policy with an associated buy/sell agreement to ensure a smooth transition?
Have you allowed for the teething issues of finding a replacement? If the shoe was on the other foot then how would you like your family to be protected? Could you see your spouse or life partner stepping into the business and assuming your role? Would you rather that they receive the real value of your business in a fair and equitable transaction?
Insurance and a Buy/Sell Agreement
There are many factors that need to be addressed when considering a buy-sell agreement, including who shall be the owner of the policy. The owner of the policy shall receive the proceeds of any insurance policies that form part of the buy/sell agreement. This is where the buy-sell agreement becomes so important as it is the agreement that governs how that insurance money is dealt with (among other things). For example, an agreement may be drafted so that the proceeds of insurance policy must be used as payment to the exiting partner. The ownership of the policy then carries with it other considerations, shall capital gains tax be applicable on the insurance money? What entity shall the insurance funds be held in? There are strategies available to work around all of these considerations in conjunction with a specialist legal representative. Getting the right advice from specialists in the field is imperative.
When calculating the insurance attached to a buy/sell agreement factors such as business value, business debt, key person risk all need to be assessed to ensure that all costs are being covered.