A Buy-Sell Agreement is an efficient way to manage a business transition when one or more shareholders are forced to exit a business due to death or disability. The more complex Buy-Sell Agreements factor in insurance cover such as life, Total and Permanent Disability, Trauma and similar insurance policies to take account of permanent exit from the business or medium to long-term removal from the business. They provide some peace of mind to remaining shareholders that they will not be forced to deal with the estate of a deceased shareholder when that person dies. It allows for the shares to be transferred in consideration for the payment for those shares utilising the insurance pay-out structured into the arrangement. Some key things to consider with a Buy-Sell Agreement are:
- Timing – At what point in time will the buy-sell mechanism be triggered. Death of a shareholder is an obvious one, but what will happen in instances where there is only a temporary incapacity?
- Value – What is the value of the business and how much are the shares of each shareholder worth? This will dictate how much insurance is sensible to put in place.
- Review – How often will the value of the business and the need for the buy-sell arrangement be reviewed?
- Accounting Issues – Often businesses are made up of intertwined dealings of the parties with shareholder current accounts being owed to shareholders, guarantees having been provided by directors, mortgages over personal home spout up as security for business debt, and dividends not yet declared by ready to pay out to shareholders.
All of these issues, as well as others, should be factored in when a Buy-Sell Agreement is being drafted, so the mechanism takes a holistic view of the business to achieve the overall desired purpose.