Business Succession – Buy / Sell Agreements

What is a Buy / Sell Agreement?

A Buy / Sell Agreement is a legal agreement which details how multiple owners of an entity will deal with their ownership proportion in the entity in the event of certain trigger events.

Often businesses are established using various structuring, such as companies and trusts. Having a Will is often not enough to deal with the exit of a deceased relevant party, particularly where their nominee shareholder / unit holder was not themselves personally.

Death of a relevant party is also not the only situation in which an entity owner (the affected owner) may need to exit (or which any unaffected owners may want an affected owner to exit). An exit may be necessary or desirable due to an affected owner’s inability to continue in the entity as they did before a certain trigger event.

What is a trigger event?

A trigger event can be anything detailed in the agreement. Common trigger events include the following in respect of the key person associated with the affected owner:

• Death;
• Trauma (for example, a serious medical condition rendering them unable to perform their duties in the entity for an extended period of time);
• Total and permanent disablement;
• Criminal conviction of an indictable offence;
• An order under the Family Law Act which deals with their ownership proportion such they they no longer have control of it; and
• Bankruptcy.

What needs to be considered?

Some of the things you will need to consider when preparing a Buy / Sell Agreement include:

• The structure in which you currently operate;
• Any current or intended future entity owners;
• Key people associated with each owner;
• Future growth plans;
• Future funding requirements;
• How the ownership proportion will be valued on the occurrence of a trigger event;
• Insurance requirements (including life, trauma and total and permanent disablement);
• Capital requirements to fund buy outs (particularly non-insurable events or where insurance is not taken out or maintained);
• The procedure to be followed upon the occurrence of a trigger event; and
• Taxation.

Who is involved in the process?

In preparing a comprehensive Buy / Sell Agreement, the parties often involved include:

• the entity owners (shareholders / unitholders) and their key people;
• the directors / trustees of the company / trust;
• your solicitor;
• your accountant and / or financial advisor; and
• your insurance broker.

Boorman Lawyers work closely with each of these other parties to ensure that all parties are working together to achieve the agreed desired outcome for the entity owners.

What happens if I don’t have a Buy / Sell Agreement?

If you do not have a Buy / Sell Agreement, a number of things could occur depending on the structure of the entity in which you operate, the structuring of the entity owners and your personal estate planning.

Often without a Buy / Sell Agreement, you may end up in business with the family or friends of an affected owner. This can be undesirable not only for the unaffected owners, but also for the affected owner and / or their family where their funds are tied up in the entity.

Having a comprehensive Buy / Sell Agreement (supported by appropriate levels of insurance) allows the affected owner to swiftly exit the entity and receive a pre-agreed value for their interest. This allows the entity and the unaffected owners to continue on with minimal disruption and allows the affected owner and / or their family to withdraw their investment when they need it most.

Next Steps

Contact us to discuss your specific circumstances and requirements. We can work with you to tailor a comprehensive agreement to suit your needs. If required, we can also assist you with your personal estate planning. Call Boorman Lawyers on 1300 941 900.

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