Buy Sell Agreement Template or Buyout Agreement 

How does a buy sell agreements work?

It’s Like A Pre-nup for your Company

When you got married, you may have signed a binding financial agreement in the hope this would never be put into fruition. You hoped the marriage would last, but you are realistic.  You took the necessary steps to make sure your assets and interests are protected.  Lets face it!  It was easier to agree on things while you were still on good terms, rather than waiting for the divorce.

This also applies to a Company 

You may have the same concerns if you’re starting a company.  You may be concerned for the following reasongs.

• Your business partner is injured or disabled or seriously injured.
• Your business partner unexpectedly passes.

A buy sell agreement, also known as a buyout agreement, is a contract that provides for the sale of an owner’s share of a business. The sale may be triggered for several reasons, such as the owner’s retirement, bankruptcy, unresolvable conflict with another owner, death, or disability. The buyer may be another owner, employee, or third party.

A smart reason to draft a buy sell agreement (especially in the Covid-19 climate) is that the  “fingers crossed method” is not a good business strategy. If you don’t have a buy sell agreement, a number of serious things can impact you business at some point.

• The business could wind up in the wrong hands.
• Without specifying a ready buyer for your business in advance, you may not receive fair compensation when you exit.
• If you are forced to find a buyer for the business on short notice, expect the sale price to be far below fair market value.

A well-crafted, comprehensive buyout agreement eliminates the above risks.

A buy/sell agreement is a contract between business partners where the surviving partners buy out the other partner’s interest should a specific event occur. Specific events usually include death, and long-term disability. A buy-sell agreement can consist of several clauses in a partnership or shareholder agreement. It can also take the form of a separate, freestanding agreement. This suite contains free-standing agreements that can be used together with a partnership, company or unit trust.

An insured buy-sell agreement is one in which a triggered buyout is funded with life insurance. A policy is taken out on each of the participating owner’s lives. The life insurance policy provides the surviving partners with the money to be able to buy out the deceased/disabled/departing partner’s interest.  Such an arrangement is often recommended by financial planners to ensure the buy-sell there will be money when the buy-sell event is triggered.  The funding aspect is covered in a separate agreement called a buy/sell funding agreement.

Capital Gains Tax implications

A trauma or total and permanent disability insurance policy is subject to CGT if it is owned by the business. Only a trauma or total and permanent disability insurance policy owned by the insured is exempt.  The business owner often holds the policy on themselves. As the buy/sell agreement results in the sale of the business, a CGT liability will arise to the vendor. The small business CGT concessions may operate to reduce this CGT liability.

Deductibility of premiums

The essential characteristic of a deductible insurance premium is that it be intended to provide an income. A self-employed business owner can claim a deduction for premiums on a policy which will pay income during a period they are disabled. Normally, if a policy includes a component to pay a sum on death or disability, the component relating to death cover will not be deductible.