Business buy-sell agreements for partners
A buy-sell agreement is the contract that decides what happens when a business co-owner exits. Without one, the business is exposed to the worst possible outcomes.
A buy-sell agreement is a contract between business co-owners that defines what happens on specified trigger events (death, disability, divorce, dispute, retirement). It typically requires the remaining owners to buy out the exiting owner’s share at a pre-agreed valuation, usually funded by insurance.
The triggers
Death of a co-owner. Permanent disability. Long-term illness. Divorce. Bankruptcy. Reaching a defined retirement age. Material breach of partnership obligations. Each trigger has its own mechanic in a properly drafted agreement.
Valuation methods
Fixed multiple of earnings (e.g. 4x EBITDA). Independent valuation by a nominated accounting firm. Pre-agreed annual valuation reviewed each year. Each method has trade-offs – the agreement should specify clearly so disputes don’t arise on the trigger event.
Insurance funding
Death and disability triggers are typically funded by insurance held by the business or co-owners. The insurance payout funds the buyout. Without insurance, the surviving owners need to find the buyout cash themselves – usually a problem.
Cross-purchase vs entity-purchase
Cross-purchase: each co-owner has insurance on the others, and uses the proceeds to buy the deceased’s shares. Entity-purchase: the company holds the insurance and buys back the shares. Tax and stamp duty treatment differs – the right structure depends on the specific situation.
Cost
Buy-sell agreements are typically a few thousand dollars to draft. Insurance premiums vary by age and coverage. The combined annual cost is typically a small fraction of the business value being protected.
Summary
A buy-sell agreement is the contract that decides what happens when a business co-owner exits. Without one, the business is exposed to the worst possible outcomes.
Talk to Sam about your situation
If this article raised questions for your own circumstances, Sam Michele offers free 20-minute initial consultations. Learn more about our shareholder agreement work, or book a consultation.
Related reading
- Why every company with 2+ shareholders needs an agreement
- Business succession planning in Australia
- Shareholder agreements
Disclaimer: This article is general information only and does not constitute legal advice. Estate planning is deeply personal - every family's circumstances are different. For advice specific to your situation, please contact Rosewood Succession Solicitors.