Buy and Sell Agreements

A buy and sell agreement is a legally binding contract that stipulates how a partner’s share of a business may be reassigned if that partner dies or otherwise leaves the business. Most often, the buy and sell agreement stipulates that the available share be sold to the remaining partners or to the partnership. Buy and sell agreements are commonly used by sole proprietorships, partnerships, and closed corporations in an attempt to smooth transitions in ownership when each partner dies, retires, or decides to exit the business.

The buy and sell agreement requires that the business share be sold to the company or the remaining members of the business according to a predetermined formula.

• Buy and sell agreements stipulate how a partner’s share of a business may be transferred in the event of the partner’s death or departure.
• Buy and sell agreements must also establish a method for determining the value of a business.
• The two most-common buy and sell agreements are cross-purchase, and company buy back; some agreements will combine the two.
• Cross-purchase agreements allow remaining owners to buy the interests of a deceased or selling owner.
• Company buy back agreements require the business entity to buy the interests of the selling owner.

In order to ensure that funds are available, partners in business commonly purchase life insurance policies on the other partners. In the event of a death, the proceeds from the policy will be used towards the purchase of the deceased’s business interest. In some cases disability cover is include, but nor severe illness.

There must be a good reason for a company buy back, as the laws are stringent, and the taxes are high.

In the case of a cross-purchase agreements, each partner must pay the premium for the life cover on the life or lives of the other partner/s. It may be paid by the company, provided the partner’s loan accounts are debited accordingly, during the current year.

Trust owned companies taking policies on the lives of Trustees, must make provision for Estate Duty, which is payable by the policy owner. The trust deed must be checked to make provision for this arrangement.

The valuation of the company is critical, and must be adjusted at least once a year to ensure the correct and current value is applied, or there could be donation tax implications.