Most people recognise the importance of having a Will to determine how their estate is distributed when they die. If you are self-employed, a partner or co-director, having a ‘Will’ or succession plan for your business is equally important.

The death or incapacity of a key player causes unprecedented interruption. The continuing partners need to fill a void and, unless funds are available to buy out the departing owner’s share, there is uncertainty over the future control and sustainability of the business.

Business disruption due to the death or terminal illness of a partner however, can be better controlled through buy-sell insurance and an effective buy-sell agreement.

Why is buy-sell insurance important?

Buy-sell insurance can minimise the impact of losing a business partner by providing lump sum funding towards a partner’s share after his / her death, total and permanent disablement or in the event of trauma. The payment enables the continuing owners to acquire that partner’s share.

What is a buy-sell agreement?

The buy-sell agreement incorporates the arrangements for partners to hold insurance and sets out procedures for acquiring a departing partner’s share.

The insurance and agreement work together as a business succession plan by providing the funding and process to sustain the business upon the happening of certain events. Disputes are minimised and partners can plan with certainty.

What are the components of the buy-sell agreement?

The buy-sell agreement is fundamental in tying together the policy arrangements and processes for sustaining the business when a partner leaves.

The agreement acknowledges the goodwill and value of the business and the respective interests held by the partners. It sets out the rights and obligations of all partners and the process for acquiring and transferring shares.

A typical agreement will consider:

·   A buy / sell option for partners to acquire and dispose of shares and the events that will trigger the right to exercise an option, whether they be death, permanent disablement or trauma.

·   Arrangements for funding insurance, the responsibility for payment of premiums and the types of insurance to be taken out.

·   The agreement should specify how the policies will be held, which may be by cross-ownership, individual-ownership, through the business entity itself, a trustee or superannuation fund. An agreement for valuing the business and each partner’s share which will be proportionate to their respective contributions.

·   Determining the level of cover required to sustain the business and buy out the relevant share of a departing partner based on the market value and partner’s proportionate interest. Provisions for maintaining and increasing cover in line with the growth of the business should also be included.

·   Terms to release the exiting partner from debts, guarantees, securities and future business liabilities.