Buy-sell agreement cover is the funding assurance for any exit transaction arising from the agreement. Principally, they relate to business succession arrangements. As with any agreement between parties, financially providing for the arrangements gives confidence to all involved. Financial arrangements covering settlement costs by the surviving partner(s) under the agreement may be drawn from a variety of sources. We return to this matter later.
Business Succession planning
Our Buy-Sell Agreements article discusses the importance of having a clear understanding of the events to trigger a business succession. Awareness of eligible circumstances facilitates making relevant financial readiness for the event. Expressing the succession planning strategy in a documented plan provides comfort to all stakeholders in the transaction. Families who are financially dependent on those directly involved are considered in this context.
Whilst the business involved will have a given value, it is also the case that:
- any continuing ‘partners’ will want minimum disruption to business continuity – and
- to achieve that will want to settle any buy out with the departing partner and/ or their family/ estate –
- as quickly as possible and
- in satisfaction of their commitments under the partnership or shareholders agreement (documented or implied).
Succession plan funding (aka buy-sell agreement funding)
Risk Insurance strategies
Insurance policies are available to cover some key risks associated with the circumstances covered in a Buy-Sell Agreement. Contracts such as term life insurance, TPD insurance and/ or trauma insurance can be effective in particular circumstances. The appropriate amount of cover by each policy will be guided by the terms of the relevant succession planning agreement. It may even be clarified (perhaps even quantified) in those documents.
Significant questions to be resolved, beyond the type and amount of cover in the context of each situation, include –
- who will own those polices; and
- who will pay the premiums.
These are important issues with significant income tax consequences. Resolving these issues can be quite complex. This is particularly so if the agreement is in respect of a business with
- multiple partners
- with relatively frequent changes in partners.
Businesses such as larger professional services entities: legal and medical practices etc come into this category.
Alternate sources
As mentioned earlier in this post, there is a variety of sources for funding Buy-Sell Agreements. They include:
- Borrowing through an acceptable lender
- On a personal level, or
- By the business
- Cash held by the survivor/ acquirer (possibly from timely realisation of financial assets
- Seeking equity partners.
Whilst not expanding on these alternatives in this post, our advice team can assist you with appropriate, timely decision making.
Needing assistance with buy-sell agreements and/ or funding…
Continuum Financial Planners can assist you with the resolution of these matters. We can help you to arrange appropriate cover, under appropriate ownership, to meet obligations that arise under the agreement.
To make an appointment to discuss your situation with one of our experienced advisers:
- call our office (on 07-34213456), or
- complete the linked Book A Meeting facility to make an appointment at your convenience.
(This article was originally posted in February 2010; it has occasionally been updated/ refreshed , most recently in August 2024.)
