When two or more parties share the ownership of a business, they each own shares in a company or units in a unit trust that carries on the business.
In the event one party dies or becomes disabled the other parties want to ensure they are able to purchase the outgoing party’s interest and in turn the outgoing party wants to ensure that their estate is paid a fair value for the interest.
Example
A, B and C own shares in XYZ Pty Ltd, a management consulting
business worth $1.5 million. They have a business succession (buy/sell) arrangement covering death or disablement. “A” dies suddenly of a heart attack, because an agreement is in place they should have a smooth transfer of ownership.
Funding Buy/Sell Arrangements with insurance
Business owners are utilising life insurance to provide the funds to purchase an outgoing owner’s interest. It is imperative that if the parties intend on funding either or all parts of the funds for the purchase via an insurance policy that a buy/sell agreement is in place.
Example
Assume X, Y and Z own equal shares between them in ABC Pty Ltd. A Buy/Sell option agreement is in place that gives each of them the option of forcing the sale to the other of their shares should any one party die.
X dies. Y and Z exercise their option to purchase X’s share from X’s estate. (Alternatively, X’s executor could exercise the option to force Y and Z to buy). The business is valued at $1.5m. X’s shares are worth $500,000. There is a life insurance policy in place on X for $500,000. The $500,000 is paid to X’s estate. X’s executor must transfer X’s share to Y and Z.