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Business Partner Risk: The 4 ways a Buy Sell Agreement can protect you!

Updated: May 6

Picture of Michael Sauer Financial Adviser and Jim Abbass Commercial Lawyer


A Buy Sell Agreement is a legal agreement between business partners which lists triggering exit events and stipulates how to fund the exit of a business owner. In this article, we are going to talk about the exit of a business owner due to health reasons – either by passing away or becoming permanently disabled and unable to work again.

Commonly, a Life and Total and Permanent Disability Insurance policy is established for each business owner so that if they become disabled or die, the insurance proceeds are used to fund the purchase of the outgoing party’s share in the business, with the family receiving the proceeds of sale.

 

The benefits of a Buy Sell Agreement include:

  1. Each business owner is guaranteed to receive the insurance proceeds equal to the value of their share in the business, rather than having to accept a ‘firesale’ value.

  2. The remaining business owners are not forced to find funds to purchase the exiting business owner’s share of the business using their own savings or having to secure extra funding. Each of these options may not be realistic.

  3. By receiving insurance proceeds from the Buy Sell agreement, it could offset or reduce the amount of life insurances you otherwise need to pay for personally or via your own superannuation. 

  4. It removes potential legal costs required to negotiate a sale when an agreement is not present. I have seen this play out in the past whereby a client incurred $50,000 in legal fees negotiating the exit price for the business (and it could have been even worse if the other party didn’t have the funds to facilitate it).


Jim Abbass, Principal at Create Legal, agrees, adding “failing to have a documented exit and succession plan can lead to unintended and undesirable outcomes, including significant costs for all parties involved. A carefully drafted Buy Sell Agreement goes a long way to facilitating a smooth transition of the business upon the exit of a business owner due to health reasons”.

 

Setting up the Agreement


A Buy Sell Agreement involves 3 professionals:

  • An Accountant to value the business

  • A Commercial Lawyer to draft the Buy Sell agreement

  • A Financial Planner to select the cover amounts (based on the business valuation) and find the best insurer and structure for the business owners.

 

To get started, reach out today and we can collaborate with the necessary professionals to facilitate the agreement and provide your business with peace of mind.

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