If you are running a business with one or more others, you probably have some sort of formal agreement governing the relationship. This document depends on the nature of the relationship, i.e. a partnership agreement, shareholder agreement or trust deed.
Many people, however, have not planned for what would happen to their business if their business partner or partners dies or loses capacity. Ordinarily, if this were to happen, the interest in the business would flow to the estate and beneficiaries of the former business partner or shareholder. This interest could be shares in a company, units in a unit trust or interests in a partnership.
This means that the beneficiaries or legal representatives of the former business partner, who might have no expertise or experience in the type of business you run, inherit the decision making role regarding the management and activities of the business.
This has the potential to introduce tension and conflict into an already difficult period.
A Buy/Sell Agreement essentially compels the former partner’s estate or legal representative to sell the shares of the former partner to the surviving partner. It also compels the remaining partner to purchase the business interest of the former partner from the estate. This way, the business interest will remain with the original partner or partners to the business. Usually, the Buy Sell Agreement will require the parties to have insurance policies to finance the Buy Sell Agreement in the event of a death or loss of capacity. This way, the surviving partner is not purchasing the property out of its own funds but rather the insurance policy which is paid out to the surviving partner.
Ultimately, a buy/sell agreement can prevent financially expensive and time-draining litigation around where the business interest should flow and how much the business interest is worth.
If you have further questions, please contact us at frank@franklaw.com.au
This is not legal advice.
Written by Tim Cargill and Zdenka Marinov and edited by Andrew Graham.