Buy/Sell Agreements are agreements embodying a succession plan which documents the trigger events which will require the other proprietors to acquire the outgoing proprietor’s interest in the business.
Buy/Sell Agreements can be entered into between:
– and unit holders.
1. The questions to consider in drafting an Agreement are:-
a) Who are the parties to the agreement?
b) What events will trigger a mandatory transfer:-
- resignation from employment/retirement;
- total and permanent disability;
- critical illness; and
c) How will the transfer be funded?
- Self-funded by each proprietor;
- Insurance whether full or partial.
d) Who will be the transferees?
e) How will the interest being sold be valued:-
- book value;
- agreed value;
- appraised value at the time of the event;
- capitalisation of earnings at the time of the trigger event.
f) How often will the value of the respective interest be determined?
g) If fully funded by insurance:-
- who will be the owner of the policy;
- who will pay the premium;
- who will receive the proceeds;
- how often is the value of the cover to be reviewed.
h) How is the buy/sell to be structured:-
- a mandatory buy/sell;
- an option agreement by way of put and call options;
- corporate entity redemption.
2. Insurance Cover
Buy/Sell Agreements are generally funded by insurance cover. The insurance funding types are:-
- self ownership;
- cross ownership;
- entity ownership;
- superannuation ownership.
Each of these funding types have advantages and disadvantages and it is important to seek legal advice on the most tax effective mechanisms.
3. Absence of Insurance Cover considerations
If not fully funded by insurance:
- what will be the terms of payment?
- if the pay-out is to be on terms, is any security to be provided by the purchaser?
- is any interest to be payable on the amount outstanding?
- at what point is the interest to be transferred?
“PWD can provide comprehensive advice in this area”