A Buy Sell Agreement is a legally binding agreement between co-owners of a business that governs what happens if a co-owner dies or is otherwise forced to leave the business or chooses to leave the business. It may be thought of as a sort of premarital agreement between business partners/shareholders and is sometimes called a “business will”. An insured buy sell agreement (under which a triggered buyout is funded with life insurance on the participating owners’ lives) is often recommended by business succession specialists and financial planners to ensure that the buy–sell arrangement is well-funded and to guarantee that there will be money when the buy–sell event is triggered. A buy sell agreement may be a separate, freestanding, agreement or may consist of several legally binding clauses in a business partnership or shareholders agreement, and controls the following business decisions:
- Who can buy a departing partner’s or shareholder’s share of the business (this may include outsiders or be limited to other partners/shareholders);
- What events will trigger a buyout, (the most common events that trigger a buyout are: death, disability, retirement or an owner leaving the company voluntarily on retirement, or involuntarily if employment is terminated); and
- What price will be paid for a partner’s or shareholder’s interest in the partnership or company and so on.
Normally the buy sell agreement is a put and call option agreement under which, on exercise of the call option, a deceased partner’s family is bound to sell the interest in the partnership of the deceased partner to the surviving partners and, on exercise of the put option, the surviving partners are bound to purchase that interest, if a specific event (in this case death) occurs. The agreement is often linked to an insurance policy on each partner’s life. The policy provides the surviving partners with the money to be able to buy out the deceased/disabled/departing partner’s interest. Generally the agreement is structured in such a way that it does not matter what business structure has been used to own the business e.g. family trust, unit trust, company or partnership.
Why do I need a Buy Sell Agreement?
In the absence of a buy sell agreement the continuing owner(s) of the business may find they are in business with the widow or widower of a deceased co-owner. The new owner may have little or no knowledge of, experience in or interest in the business and, worse still, may have an inflated view of the value of the business and its capacity to generate income for the owners. A properly drawn buy sell agreement will provide certainty for a retiring co-owner or the family of a deceased co-owner that they can sell their interest in the business for an agreed price or a price calculated by reference to a pre-agreed formula It also provides co-owners with the ability to buy out an underperforming or miscreant co-owner on the same basis. There will be comfort for an older co-owner that his or her family will be looked after if the buy sell agreement is underpinned by insurance policies which are regularly reviewed to ensure the sums assured are up to date and appropriate.
How we can help
If you are starting a business or about to buy a business we can work with your other professional advisors, your accountant, financial planner and life insurance broker to ensure you adopt the structure to own the business which enables you to minimise tax, protect personal assets from exposure to business risk, and addresses business succession planning from the outset. Normally, if there will be more than one owner, we will prepare a partnership agreement or a shareholders agreement, as appropriate, and will include the buy-sell agreement in that document, which will also regulate the other arrangements between the co-owners in relation to ownership and operation of the business. If you have an established business we can review your existing documents to ensure they include a buy sell agreement and amend or prepare a new document to include a buy-sell agreement. Contact a member of our Business Law Team. How can we help?