Buy Sell Agreements

What Is A Buy Sell Agreement?

Sometimes called a “Business Will”, a Buy Sell Agreement is a contract between business owners that provides what is to happen if one of them involuntarily and unexpectedly departs the business.

Usually the agreement gives each owner the option of buying the interest in the business of an owner who dies, suffers a critical illness or major trauma or who becomes totally and permanently disabled. If one of those trigger events occurs to an owner, then the other owners can use their option to acquire the business interest (or a designated portion of that interest) of the departing owner. The funding to pay for the transfer of the departing owner’s business interest is usually provided by insurance proceeds from policies that are taken out by each owner for that purpose.

However, where the insurance proceeds have not been increased in step with the value of the business then the continuing owners may be required to cover the shortfall themselves by instalments payable over an agreed period or some other method.

While the preferred position will always be to fund the acquisition of a departing owner’s interest via insurance policies, it may not be possible for owners to obtain insurance cover in all cases (e.g. an insurer may decline to cover an owner who has a serious medical condition or illness or who has suffered a serious injury).

Plan Now For Peace of Mind.
Whatever the situation, the consequences of a failure to plan and not having appropriate arrangements in place can be disastrous. The situation is potentially fraught with emotion and there’s a probability that disputes and unwanted distractions will impact on the operation of the business. What can be guaranteed is that everyone involved will be unhappy with the ultimate outcome.

Not having a formal Buy Sell Agreement and appropriate insurance funding in place when an owner dies or can no longer work in the business, can lead to disputes between the surviving owner(s) and the departing owner and their family about:

• The terms on which the surviving owner(s) may be willing to acquire the departing owner’s interest;
• The value of the business (e.g. the surviving owner(s) may argue the value of the business has been reduced due to the lack of contribution by the departing owner); or
• The departing owner’s family may choose instead to take an active role in the business – whether or not they truly want to, are qualified to do that, or more importantly whether the other owners want them involved.

Whenever two or more people own a business, it is essential to have a proper Buy Sell Agreement in place to ensure a seamless and dispute free transfer of an owner’s business interest if one owner has to leave the business involuntarily. Brien Leibinger Lawyers can help. We’re experienced at preparing Buy Sell Agreements tailored to the individual requirements of businesses. Contact us today on (07) 4225 5420 or info@leibingerlawyers.com.au