Wednesday, 31 January 2018

Business Succession Planning - Buy Sell Agreements

When a business has two or more owners, a Buy-Sell Agreement can be used to assist in dealing with the transition for the buy-out of an outgoing party’s interest where a “triggering event” occurs.

A triggering event could be the death, permanent incapacity or bankruptcy of an owner.

A Buy Sell Agreement could be used to deal with:
  • shares in a company; 
  • units in a unit trust; or 
  • a partnership interest. 
Typically, the Buy Sell Agreement has a funding component linked to insurance. There are a number of different insurance funded models and appropriate further enquiry and professional advice should be obtained about each before a buy-sell arrangement is put into place.

The terms and conditions of the Buy-Sell Agreement:
  • allow the business owners to effectively pre-set a mechanism for determining the purchase price to be paid for the outgoing owner’s share of the business; and 
  • utilise the outgoing owner’s life and/or total & permanent disablement (TPD) insurance (as applicable) to provide the necessary funds for the acquisition. 
In a company ownership of insurance policies model:
  • each owner (shareholder) enters into a Buy-Sell Agreement with the company; 
  • the company purchases a life insurance and TPD policy in respect of each owner; 
  • the policies of insurance are owned by the company and the company pays the insurance premiums; 
  • if an owner dies, the insurer pays the death benefit to the company; 
  • the deceased’s legal personal representative (LPR) sells the deceased’s shares to the company and the company uses the proceeds from the insurance to purchase the deceased’s shares at the purchase price set out in the Buy-Sell Agreement; 
  • the LPR can then disperse the proceeds to the deceased’s beneficiaries as per the deceased’s Will. 
There are tax considerations (eg. CGT) to also take into account and appropriate professional advice should be obtained before a buy-sell arrangement is put into place.

Buy Sell Agreements typically also work in harmony with a Shareholders Agreement, which covers the structure of the company and each directors/shareholders responsibilities.

It is equally important that each owner has an up to date Will and Enduring Power of Attorney which work in with and support the intention of the owners set out in the Buy Sell Agreement.

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Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2018, All rights reserved.

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