A Buy/Sell Agreement is a valuable piece of your business succession plan. For those who run a business with co-owners, you should always consider a Buy/Sell Agreement as it puts measures in place to enable continuing owners to acquire the share of an exiting owner.
These are particularly useful on the death or permanent incapacitation of an owner. Without a Buy/Sell Agreement, the other partners may not be in a position to fund the acquisition of the deceased or incapacitated party’s share.
Funding an Agreement
A Buy/Sell Agreement generally provides that life and TPD insurance proceeds are applied to fund the purchase of the deceased or incapacitated party’s shares by the continuing partners.
This way, the family of the deceased or incapacitated party can receive a benefit from the value created in the business, and the continuing partners aren’t forced to mortgage their houses to buy the share.
Valuation
A Buy/Sell Agreement will provide for an agreed valuation method to be used to determine how any interest will be calculated upon the departure of a co-owner.
This valuation method will also determine the level of any insurance cover this is needed under the Agreement and will provide for the allocation of insurance proceeds to enable the acquisition of the share.
This reduces the risk of a dispute.
Structures
There are various structures and methods. By working with your lawyer and your financial planner, you can determine the structure that suits you, depending on the parties, the type of business structure and the parties’ circumstances.
Typical structures include:
- Self-ownership: This is one of the simplest forms of ownership where the insured person is the policy owner and controls the policy even if they step away from the business. Normally the policy would contain a nomination of beneficiary.
- Cross-ownership: This is where the owners take out insurance on each other meaning that the policy ownership will change with any change in business ownership.
- Insurance trust: A trust will own the policy on behalf of the business owners and therefore the policy is not affected by changes to the business ownership.
- Business entity: The business or trading entity owns a policy on each of the business owners. The business then uses the insurance proceeds to purchase back the outgoing owner’s share (a share buyback).
Tax issues
Co-owners should seek professional tax advice before putting an Agreement in place as certain trigger events may result in different tax liabilities and consequences such as capital gains tax.
How can Nevett Ford help?
If you are a business owner or looking at entering into business ownership, Nevett Ford Corporate and Business Team can assist you with any Buy/Sell Agreement queries you have. We can be contacted on +613 9614 7111 or email at melbourne@nevettford.com.au.