What is a buy/sell agreement?
A buy/sell agreement is a contract entered into by the owners of a business which determines how each owners share in the business is dealt with when one business owner passes away. Generally, buy/sell agreements are structured that when a business owner has a significant event, has a total and permanent injury, bankruptcy or other significant event which affects their ability to operate the business (“a Significant Event”), their share in the business is divided between the remaining business owners. In exchange, an insurance policy is paid out to the departing business owner or their family or estate on their death.
Why have a buy/sell agreement?
Buy/sell agreements are important for both businesses, business owners and the families of business owners.
A businesses operations may experience considerable inconvenience if there are not appropriate mechanisms in place to deal with a departing business owner’s interest in the business. For example, it may result in people with no knowledge of the business obtaining an interest in the business.
Buy/sell agreements are most effective when an insurance policy is maintained for the purpose of buying out a departing business owner’s share in the business. This means that when a business owner departs a business, they or their family or estate is swiftly compensated for the value of the deceased’s business owners share in the business. Further, buy/sell agreements prevent the continuing business owners from having to personally purchase the deceased business owner’s share of the business.
Issues to consider in a buy/sell agreement
If you need a buy/sell agreement, you should consider the following issues:
- Who wants to retain control of the business if one or more owners pass away?
- How is the deceased business owner’s interest in the business to be divided between the surviving owners?
- What type of insurance policy is required?
- How the value of the insurance policy is maintained under a buy/sell agreement yet to be determined.
- Is your buy and sell agreement structured so that the payout of the policies occur in an acceptable manner.
- Do you cover bankruptcy, illegal conduct or other specified conduct as a terminating event.
If you require advice on a buy/sell agreement, or assistance preparing a buy/sell agreement, please do not hesitate to contact Lynn & Brown Lawyers on 9375 3411 or https://www.lynnandbrown.com.au/contact/
About the author:
This article was authored by Stirling Owen who is a lawyer at Lynn & Brown Lawyers. Stirling is experienced in commercial law, litigation, probate & Wills and employment law.