Reading time: 3 minutes

A buy-sell agreement is often referred to as a ‘business will’.  It allows the parties to the agreement to set out how their interests in the business will be dealt with upon a trigger event including death or total and permanent disability (TPD).  A buy-sell agreement can be used by both a partnership and a company and can be used in conjunction with a partnership agreement or shareholders’ agreement or incorporated into these documents.

What is a Buy-Sell Agreement?

A buy-sell agreement is, in a general sense, an agreement between co-owners of a business that grant: 

  1. An outgoing proprietor the option to sell its respective interest in the business to a continuing proprietor(s) (known as a put/sell option); and
  2. An option for a continuing proprietor(s) to purchase the outgoing proprietor’s interest in the business (known as a call/buy option), upon the occurrence of specified trigger events.

These trigger events are generally involuntary events such as death and TPD and can also include critical illness and trauma.

Why Have a Buy-Sell Agreement?

A Buy–Sell Agreement provides some key benefits to a business and is an integral part of the business succession planning process.   Some key benefits include:

  • minimising the uncertainty for the business operation;
  • reducing the risk of ownership disputes upon a trigger event; 
  • providing the outgoing proprietor or its estate financial compensation for the disposal of its interest in the business; 
  • allowing the business’ continuing proprietor to acquire the outgoing proprietor’s interest in the business upon a trigger event; and
  • providing the continuing proprietor with financial protection by allowing him or her to concentrate on dealing with the impact on the business in the absence of an outgoing proprietor.  Rather than how are they going to buy the outgoing proprietor’s share in the business or prevent a third party from doing so.

How are Buy-sell Agreements Funded?

A buy-sell agreement deals with the funding of the buy-sell obligations of the respective proprietors. Insurance is considered the most common and effective form of funding. The business’ proprietors generally take out insurance policies for the relevant trigger events. The sum insured is the value of each owner’s share of the business, updated at least on a yearly basis.  Here, when a trigger event takes place, the remaining business’ proprietors will apply for a payout of the outgoing proprietor’s insurance policy to pay for their purchase of the outgoing proprietor’s business interest.

A business proprietor can own an insurance policy in a number of ways including: 

  •         self-ownership;
  •         cross-ownership;
  •         company ownership;
  •         superfund trustee; and
  •         insurance trusts.

What Else is Included in a Buy-Sell Agreement?

Besides granting the necessary buy/sell options for the proprietors, buy-sell agreements may also make provision for:

  1. The exercise period for any option; 
  2. The calculation of the value of the interest and company value including requirements for independent valuations.  As the business will likely change over time, the agreed value is usually the value at the time of the trigger event; 
  3. Consequences for the exercise of an option; 
  4. The transfer of the interest including assumption of liabilities, release by proprietors and indemnity; 
  5. Termination and adjustment; 
  6. Representations and warranties; and
  7. General provisions.

Conclusion

If you need a business lawyer with experience in drafting contracts to assist you with your own buy-sell agreement, LegalVision’s team would be delighted to assist. Please get in touch on 1300 544 755. 

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards