What is a buy sell agreement?
A buy sell agreement is an enforceable contract between the equity owners of a business or jointly held asset dealing with the transfer of ownership and control of that business or jointly held asset on the happening of agreed events.
Normally, when the exits are funded by insurance, the agreement is called a buy sell agreement. However, any agreement about exits on the happening of events is a buy sell agreement.
What the buy sell agreement does
A buy sell agreement is normally about 2 things:
- an orderly passing of control and ownership on death, disability and/or trauma (as agreed); and
- the funding of that process by insurance funding and/or non insurance funding.
No buy sell agreement, no certainty
If you do not have a buy sell agreement covering all of those events, quite simply, they will not be provided for and that creates complete uncertainty about the passing of control and ownership when the event happens. That can be avoided with a well-prepared buy sell agreement. It is like a business will.
What does the buy sell agreement look like?
Normally, the buy sell agreement is done by way of put call options over the equity owner’s interest in the partnership, company or trust.
What are some of the important decisions that need to be made in doing a buy sell agreement?
You will need to decide on the following things before being able to finalise and sign a buy sell agreement:
- How will any insurance policies be owned? Unless there are other compelling reasons, self ownership is normally the best way to own the policies.
- What valuation method is going to be used for valuing an interest in the business or asset?
- Are the insurance policy proceeds all that an exiting party is to receive for their interest?
- Are the insurance policy proceeds only a part of funding the exit?
- If an exiting party does not receive any insurance policy proceeds (other than due to default by the exiting party), do the non exiting parties still need to pay out the exiting owner from their own funds?
- How will insurance policy premiums be shared? Does each party pay their own? Are the premiums shared equally across the insured parties, which will be favourable to those paying higher premiums.
Whatever decision is made, it is best that the insurance policies are managed as part of the business governance and premiums are paid from the business, otherwise the policy can easily lapse for non-payment without the parties being aware.
- If the buy sell agreement remained in place for the long term and at some point insurance became impractical, how can a party cause the agreement to be reviewed?
How can I put a buy sell agreement in place?
Contact Long Saad Woodbridge Lawyers to discuss your needs.
Disclaimer
The information in this article is general in nature and is not intended as legal advice. You should not do or fail to do anything in reliance on information in it. We do not accept any responsibility for any loss that you suffer if you do. You should seek professional advice before you do anything about the issues set out in this article.
