When a business owner is no longer able to run their company, this can leave their business partner in a sticky situation. Life events such as death, divorce, retirement, bankruptcy or long term disability can lead to a need to replace a business partner and acquire their share of the business.

Buy Sell agreements are contracts entered into by business partners who undertake to be bound by each other’s interests if these events occur. They are often linked to a business owner’s life insurance policy so that the remaining business partner has the money to buy out the other partner’s interest in the company. The majority of buy sell agreements are flexible enough to accommodate a variety of business structures.  These agreements can apply to companies, partnerships and trusts and are most commonly used by small businesses that have more than one co-owner.

How is the agreement funded?

Buy sell agreements are usually funded by insurance policies. There are a number of ways this can be done.

Policies can be held by the owners of the business on behalf of each other. This is the most common arrangement known as a cross-ownership agreement. Thus when a business partner dies or becomes injured, insurance payouts can be used to purchase shares in the business.

Partners can also hold policies on behalf of themselves as principals. In some circumstances a sole owner will hold policies on behalf of all the other owners which is known as a discretionary trust. Finally, the company may hold policies on behalf of the owners.

Why should I have one?

Buy and sell agreements simplify the task of deciding who will run the business when one partner is no longer able to. When a business partner dies, the heirs to the business may be too young to take the reins or might be uninterested in doing so. In any event, a buy sell agreement will take precent over a will. This can avoid unwanted involvement in the business from inexperienced family members who have been left an interest. Surviving partners are also safeguarded against ending up with a new business partner that they do not want.

Without a buy sell agreement remaining business partners may be forced to take out a loan to buy the remainder of the business shares. The interest acquired from a loan may cause the business to suffer.

What should the agreement contain?

It is imperative that these agreements clearly spell out the owners of the business and what interests they have. In addition the interest to be transferred must be specifically defined (in shares or units). Each agreement should also define how the value of the business is to be measured. This is important as it has tax implications! You may wish to define your company’s value as book value, agreed value, appraised value or in terms of its capitalised earnings. For this reason it is important to review your insurance policies frequently and create an agreement to maximise your tax concessions.

Buy Sell agreements can reduce the stress and unnecessary complications involved in replacing a business partner. These agreements ensure the best outcome for your business and provide surviving partners with the means to retain ownership and control over their company. Law Central has made this easy by allowing you to construct a personalised Buy sell agreement using our online Build a Document process. Click here to get started and protect your personal and business interests.