A buy-sell agreement protects your business against the unexpected exit of yourself or your business partner. Like having a will in place for your personal affairs, a buy-sell agreement specifies the wishes of the business owners and the actions that should be taken if one of them leaves the business. It is a fundamental good practice for you as a business owner.
It pays to be prepared. Life is unpredictable and the exit of you or your business partner is possible at any time. An involuntary exit may include death, serious illness or disability, misconduct, bankruptcy or divorce. Whereas a voluntary exit is usually planned, such as the retirement or alternative career interests of a business partner.
Whatever the circumstances of a business partner’s departure, a buy-sell agreement is a legal document that can protect the business by clarifying and formalising the arrangements for shareholding.
What is a buy-sell agreement?
A buy-sell agreement usually lists the events (or ‘triggers’) that could lead to a buy-out. These include death, disablement, divorce, retirement and so on.
The agreement should state the formula to be used to value your respective shareholdings. This may involve factors including:
total gross business revenue;
the value of fixed assets; and
a multiple of the business’s regular earnings.
goodwill may also be taken into account, and comparisons with like businesses may further inform the process.
A buy-sell agreement should also outline how entitlements are to be distributed in the business owners’ estates and trusts.
Putting in place a buy-sell agreement also entails agreeing on appropriate funding. Options may include personal savings, business loans and insurance entitlements.
Why is a buy-sell agreement so important?
When a business partner leaves a business, the consequences can be extremely challenging if there is no buy-sell agreement in place. They include:
the possibility of protracted legal action over the ownership and control of the business assets;
lack of clarity over the fate of the vacated shareholding;
the potential for members of the business partner’s family to become involved in managing the business; and
the potential forced sale of the business to provide finance for the family of a deceased business owner.
The purpose of a buy-sell agreement is to avoid disruptive and distressing possibilities such as these.
How we help
ADX Accountants and ADX Wealth can help you articulate and formalise your buy-sell agreement. We can offer advice and insights, as well as collaborate with aligned professionals including your business valuer, risk advisor and legal representative.
Please contact me to find out more about a buy-sell agreement for your business. Call (02) 8115 9262 or email Tony Bates at tony@adx.com.au
Tony Bates is a Financial Advisor for ADX Wealth and licensed under AFSL 500640.
The information (including taxation) contained within this document is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. ADX Accountants and ADX Wealth strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.