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Posted Wednesday 8th October 2014

Buy/sell to future proof your business

Buy/Sell Agreements

What would happen if one of your business partners died or became permanently disabled? Would you have the financial means to be able to pay them out and ensure their exit from the business? If not, you may find that the beneficiaries of that person's estate will continue to profit from the business and may even have a say in the business!

Buy/sell agreements - overview

The buy/sell agreement is (usually) an agreement between the partners to a business providing for the use of life insurance to provide for the payout of a partner or their estate upon that partner's death or disability. The surviving partners acquire that person's shares without a significant financial burden.

It is a fundamental tool in succession planning for businesses and to ensure that the business can continue to trade after the death or permanent disability of one of their key stakeholders.

The idea behind this is that:

  • either the partners or the company (depending on the particular agreement adopted) take out life insurance policies on each other at a predetermined value, usually based on the value of the business at the time of taking out the insurance.
  • if a partner (or if the partner is a trust or company, the key person behind the partner) dies, the proceeds of the relevant life insurance policy are received by the deceased/disabled partner or his or her beneficiaries.
  • depending on the buy/sell agreement, the surviving partners then acquire the interest of the deceased/disable partner for either no further payment or for a value determined under the buy/sell agreement less the value of the insurance proceeds received by the deceased/disabled partner or his or her beneficiaries.

Life insurance

Although there are other ways of funding a buy/sell agreement, the advantage of using life insurance is that it allows funds to be delivered at the moment that they are needed the most and avoids the uncertainty that the surviving partners may not be in a position to fund a buy-out of the deceased/disable partners interest.

Under most circumstances, proceeds are received by the beneficiary income tax-free and the company can pay the insurance premiums and obtain a tax deduction on them.

We can work with your insurance broker or financial planner to ensure that the life insurances you put in place are appropriate and in line with the objectives of the buy-sell agreement.

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