What is a Buy/Sell Option Agreement?

In any business the partners are the most important asset for the business, if something happens to you or your partner(s) then it is important that you plan for the future to ensure that a proper succession plan is in place. If you are in business with a business partner then you must think about the consequences if you or one of your partners un-expectantly dies, or is disabled to the point that they can no longer function in your business.

Generally partners in a business or directors and shareholders in a company enter into an agreement which governs the day to day relationship between the parties. These are generally partnership agreements and/or shareholders agreements. The purpose of these agreements is to generally set out the rights and obligations of the parties and to set the rules for the operation of the business.

These agreements, generally, do not set out the rules for dealing with the parties when something happens to a partner that impedes them from being able to operate in the business. Generally speaking the consequence of this is that the deceased or injured parties family will have the right to get involved in the business, this can be the case even when they have little or no experience in the business.

A buy/sell agreement is a contract entered into between business partners pursuant to which the surviving party is bound to buy out the other parties interest in the business should a specific event occur. Specific events which may trigger a buy/sell agreement include death, long-term disability, retirement or bankruptcy.

Often the parties take out an insurance policy on each other parties life. This allows the surviving party to buy out the other parties interest.

Strategy analysis

A business may be transferred on the death of an owner either by:

• gifting the business via a will; or
• selling the business via a buy/sell agreement

The buy/sell agreement will take precedence over the will because the business will be transferred pursuant to the contract.

Funding the agreement

The buy/sell agreement is normally funded through an insurance policy. However it is important that the parties consider the consequences if that insurance policy is not honoured by the insurance company or is cancelled for a reason outside the control of the parties.

Important consideration should be given to the value that is placed on the persons interest in the business. Usually parties either agree on a figure or arrange for a valuation to be undertaken of the business. The advantage of this approach is that it allows for the insurance policy to be upgraded without the need for the parties to amend the option contract.

At Masons Lawyers our solicitors have extensive experience in advising parties of the rights and obligations regarding buy sell option agreements and assisting parties to draft the contract in a proper and binding manner. Our experience is your advantage. Contact us to arrange for a consultation in relation to drafting a buy sell option agreement or if you have any questions.

Jeremy Streten
Legal Practice Director
Masons Lawyers Brisbane