A Buy/Sell Agreement (often called a Business Succession Agreement or Buyout Agreement) is a contract that allows for the future payout or sale of your business interests to your business partner(s) upon the occurrence of a trigger event. Typical trigger events include the death or disablement of one of the business partners.
Buy/Sell Agreements are often linked to insurance policies and are used by a wide variety of businesses where a trigger event would have a significant affect on the business. Think of it like having a will in place for the business. It’s awful to think about, but necessary to have.
If you own a business and you’re concerned about how the death, disablement or retirement of one of your business partners may have on the operation of your business, then a Buy/sell Agreement can assist you. Not only can it allow you to purchase you partner’s share if any of these things trigger events were to happen, but it can also help you avoid your ex-business partner’s husband or wife moving into your business.
What do I need to do to put a Buy/Sell Agreement in place?
Once you have decided to put a Buy/Sell Agreement in place, it will be important to speak with your professional advisers about the following:
1. Determining a valuation for your business
2. Deciding how to fund the transaction (i.e. use of life/disability insurance)
3. Deciding which trigger events are appropriate for your business
What if a deceased business partner had gifted their portion of the business via their Will?
Of course it’s common for business owners to gift their business interests under a Will. However, this is why it is so important to have a Buy/Sell Agreement in place.
A Buy/Sell Agreement will take precedence over the Will because the deceased’s business interests will transfer in accordance with the contract. Therefore, the business will not form part of the deceased’s estate.
Are there any Capital Gains tax implications?
Effectively Buy/Sell Agreements result in the business assets being transferred or sold to the other business owner(s). As such, it is important to consider and understand the capital gains tax position under Buy/Sell Agreements.
If a Buy/Sell Agreement trigger event activates the payment of a life insurance policy for example, it may be exempt from capital gains tax provided the gain or loss is made by:
1. the original beneficial owner of the policy;
2. an entity that acquired the policy for no consideration; or
3. the trustee of a complying superannuation fund.
However, other insurance policy payments may (unless exempt) be subject to capital gains tax (i.e. payouts relating to disability).
Be sure to seek out advice in relation to capital gains tax implications prior to finalising your Buy/Sell Agreement.
Is there a standard Buy/Sell Agreement template available?
As with most things, enough google searching should enable you to locate a template Buy/Sell Agreement. Would we recommend using a template? No, no, and no.
Any form of legal template will be written with generic terms and conditions, and quite often the wording can be unclear and confusing.
The risk with template legal documents is two fold:
1. The document will not be tailored to your business and your specific circumstances; and/or
2. The document may not be enforceable and as such renders the entire process a waste of time and money.
The choice is of course yours, but we would always recommend that business owners ensure their contracts are valid and enforceable.
Need legal advice?
If you’re thinking about business succession and would like a commercial lawyer to guide you through the process, you can get a Quick consult with experienced lawyers. With Quick Consult, you can check out in minutes and for a transparent, flat fee, the lawyers will call you back on the phone within 1-2 days to answer your questions and give you legal advice.
This article is written by Karen Finch and was first published on the Legally Yours website.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.