Buy Sell Agreements
Purpose
A Buy/Sell Agreement is an agreement between business partners where they agree that if any of them dies or becomes disabled, the others would be able to buy the deceased/disabled partner's equity in the business for an agreed price using insurance proceeds.
Example
Below is a simple, hypothetical example to illustrate how useful it can be to have a Buy/Sell Agreement with the related insurance policies.
Death or TPD of Business Partner: Scenario
Following a health scare in his family, Jasper, a director, had started to wonder what would happen to his business if he or his business partner, Eric, passed away or became unable to work for health reasons (e.g. if he became disabled). If this happened, neither Jasper nor Eric would have the resources to buy the other out. Added to this, it would be virtually impossible to find an outsider to take up the shares.
If Jasper passed away or became unable to work, Jasper’s family would not receive any benefit from the business. Equally confronting, Eric may end up having Jasper’s wife, Helen (or other heirs/executors/guardians), as a business partner, needing her consent for decisions regarding the business. (The same would of course apply the other way around if Eric passed away or became unable to work).
Following advice, Eric and Jasper entered into a Buy/Sell Agreement, agreed on the value of the business and obtained life and TPD insurance. Now if Jasper passes away or becomes unable to work, Eric will buy out Jasper’s interest in the business at the agreed price using insurance monies from the insurance policy. That way Jasper’s heir, his wife Helen, receives a substantial payment and Eric owns the whole of the business and can make all decisions regarding the business on his own without needing consent from Helen.