What are Buy-Sell Agreements?
Buy-sell agreements are legal contracts that allow for the transfer of a business to a previously agreed party or person. This is similar to a business sale contract, but different. Whilst a sale contract considers known circumstances, buy-sell agreements contemplate ‘trigger’ events/ processes that ensure business continuity in anticipated circumstances. Having agreement means that there will be minimum disruption, confusion, or dispute when you relinquish control. Relinquishing control may arise through death, disability, or upon retirement: a situation that is comforting to most stakeholders.
This agreement is one of the key documents in a business succession plan. As with most business-based planning, it is preferable that the succession plan be documented. Regrettably many business owners fail to do so. A minimum position should be the documentation of the Buy-Sell Agreement (and its funding through insurance policies). Both the agreement and the policies employed to fund it should be kept up-to-date from that time forward.
When are they used?
As mentioned above, the three key circumstances giving rise to these agreements, are:
- Death,
- Disability, or
- Retirement.
So, planning for these events in a buy-sell agreement ensures business continuity in circumstances prescribed in the agreement, albeit:
- The circumstances might not be planned, but can be contemplated
- They can arise without notice. Accidents, serious illness, even death are amongst the more obvious situations of concern.
Importantly, ensure that your family’s needs are considered in any consequent transaction. This will mitigate the risk of their financial circumstances being eroded.
In this respect business succession planning also ties in with personal estate planning.
Funding their provisions.
It is usual to have the provisions of these agreements supported by funding arrangements. Often this is met with implementing a personal risk insurance strategy that will be referenced in the agreement. (Refer our article Buy-Sell Agreement cover for more on this topic.)
Want help organising a Buy-Sell Agreement (and Cover)?
To consult with the advice team at Continuum Financial Planners for guidance or assistance in respect of your Business Succession Plan, or of your Buy/sell agreement:
- phone us on 07-3421 3456; or
- complete the linked Book A Meeting facility to make an appointment with an experienced adviser at your convenience.
‘We listen, we understand; and we have solutions’ – and if the matter needs to be referred to another professional for completion, our network referrals will be available at your convenience.
(First posted in January 2010, this article has occasionally been refreshed/ updated, most recently in August 2024.)
