The structure of many businesses is a partnership, and one question that is often asked of Perth commercial lawyers, is “What happens to the business partnership should anything happen to me?”. The “anything happens to me” part of that question is a subtle way of saying “if I died”. Regardless of your age, whilst your death may not something you want to dwell on for too long, it is never prudent to have made no contingencies, especially if you have assets that include a business.
Such an asset would be your share of a business that you are a partner in, and thus we are going to look specifically at buy-sell agreements which deal with partnership ownership in the sad circumstances following a partner’s death. We should also point out that whilst buy-sell agreements often trigger when a partner passes away, they can also be triggered by other events.
What Is A Buy-Sell Agreement?
A buy-sell agreement is an agreement between the partners of a business that can be triggered when one of several possible events occur. What a buy/sell agreement will instigate is for a partner who is remaining in the business to be able to purchase the share of the business of the partner who has left the business.
The main criteria for a trigger event include it being impossible for one of the partners to have any meaningful contribution to the business. In most cases, the trigger event will be something that happens involuntarily or unexpectedly. Other than a death, trigger events include terminal illness, long-term hospitalisation, disability, or a partner being institutionalised as a result of mental illness.
How Is the Purchase Via A Buy/Sell Agreement Funded?
One of the clauses within a buy/sell agreement is a valuation of each partner’s share of the business. To ensure this value is accurate and fair, it is either determined using a formula at the time the purchase is to take place, or the value of the business is recalculated each year.
If the value falls within certain limits, the purchase can be funded from insurance policies. These policies will have been taken out by the partners and they will insure against any of the trigger events that are specified. The amount of payout will usually be the equivalent of the value of each partner’s share of the business and this amount is used to pay for the share of the business of the partner who has left when the insurance company pays out on the policy.
Benefits Of Having A Buy/Sell Agreement
Benefit #1: Given that the events covered are usually unforeseen, it prevents the risk of uncertainty regarding the business and how it will continue following a partner suddenly leaving.
Benefit #2: If a trigger event happens, buy/sell agreements will minimise the risk of the remaining partners having a dispute as to the purchase of the outgoing partner’s share and ownership of the business.
Benefit #3: It provides a means for remaining partners to continue the business as seamlessly as possible and without any major disruption to its operation.
Benefit #4: It ensures that the co-owner who is leaving, or their dependents, or their estate, is financially compensated for their share of a business they co-owned.
Benefit #5: It saves the remaining partners much time and effort having to sort out selling the outgoing partner’s share including all the legal technicalities and financial implications that would follow.
