Q: Do I need a Buy Sell agreement?

A: IF in your own name, or that of a Company or Trust, you hold with other parties an interest in a business or jointly held asset

AND on the death, trauma to or disability of one of the people with whom you are in business or hold the asset you need to provide:

• a structured timetable for; and
• a ready and adequate source of funds to permit both:
  • the purchase by you at an agreed value of the deceased, traumatised or disabled's interest in the business or jointly held asset; and
  • transfer of control in that business or asset,

THEN a Buy Sell Agreement can do this for you.

Q: What is a Buy Sell agreement?

A: It is an enforceable contract between owners of a business or jointly held asset dealing with the transfer of ownership in and control of that business or jointly held asset.

Q: What assets can a Buy Sell agreement cover?

A: Buy Sell Agreements can cover more than just interests in a business. They can be effective for any jointly owned asset.

Q: What will a Buy Sell agreement do?

A: As mentioned, a Buy Sell Agreement will provide a:

• structured timetable for; and
• ready and adequate source of funds to permit both:
  • the purchase by non exiting partners at an agreed value of an exiting partner's interest in a business or jointly held asset;
  • transfer of control in that business or asset to the non exiting partners.

Without an effective and adequate Buy Sell Agreement in place, there is no guarantee that these 2 critical things will happen.

The Agreement will provide for the unique structure of the particular business or jointly owned asset (ie partnership, company or trust) and permit entry and exit of partners, shareholders or unit holders without causing unwanted stamp duty or capital gains tax problems.

Q: What events can a Buy Sell agreement cover?

A: As you can insure against death, trauma and disability, they are often the events covered in a Buy Sell Agreement. When they occur, if insurance policies are in place, there is certainty as to the availability of the funds required to transfer the interest in and control of the business or asset.

However, other events, such as bankruptcy, retirement or default in complying with an agreed condition relating to the business or asset, can also be treated as an event that gives rise to the rights and obligations under the Buy Sell Agreement. The funding of the transfer of ownership and control would however need to be provided for.

Q: How does a Buy Sell agreement work?

A: Each party that holds an interest in a business or jointly held asset will:

• take out a life, trauma and/or disability insurance policy in respect of the person who represents that party in the ownership of the business or asset; and
• grant to the other an option on death, trauma and/or disability to be able to force the transfer at market value of the ownership and control of the business or jointly held asset;

The interest of the deceased, traumatised or disabled party in the business or jointly owned asset is transferred to the other owners on the happening of that event.

Q: What do I need to do if I want to put a Buy Sell agreement in place?

A: You will need to:

• decide on what events you want to cover (life, disability, trauma); and
• then find out from your insurer about the cost of that insurance, as cost can sometimes be too much to justify proceeding with it.

Before you agree on the form of the insurance to be taken out, you should ask your insurer to set out the proposed arrangements in writing so that your lawyer can check the structure of the insurance can be checked against the form of the Buy Sell agreement.

Your lawyer can then help you prepare the Buy Sell agreement.

Once you agree on the form of the Buy Sell agreement and it is ready to sign, you can implement the insurances.

Q: When should I revise the amount of insurance cover?

You should ensure that the amount of insurance cover always reflects the market value of the insured's interest in the business or jointly owned asset. At least annual reviews should be done. Remember, you may:

• not always be able to get more insurance in the future so you may prefer to get it while you can
• want to make an allowance in the insured amount for any capital gains tax that may be payable on the disposal of the interest in the business or jointly held asset

For assistance please contact:

• Jim Main

• Brendan Cockerill