Buy and Sell Agreement

An agreement that ensures the continuity of the business when a partner/shareholder dies or becomes disabled. It solves quite a few problems that can develop on the death/disability of a partner. Numerous problems arise in a business when a partner, sole proprietor, shareholder or member dies.

The only effective solution to these problems is a pre-arranged Buy-and-Sell agreement properly funded with life assurance. In this way, liquid reserves are immediately created. This will enable the survivors to pay out the deceased’s share to his estate and carry on the business.

In the event of the death/disability of a partner his/her share will be purchased from his estate, by the remaining shareholders. The best method of providing the money to buy the share of a deceased partner from his estate, is for each partner to buy life assurance on the lives of their partners. The amount of assurance will be equal to the purchase price agreed upon.

Example
Value of Company – R 5 000 000
Director A: Share 40%= R 5 000 000 x 40% = R 2 000 000
Director B: Share 40%= R 5 000 000 x 40% = R 2 000 000
Director C: Share 20%= R 5 000 000 x 20% = R 1 000 000

Very simply, in the example, should Director B die or become disabled the proceeds of his/her policy will be paid to the remaining partners A and C. Directors A and C would use these proceeds to buy Director B’s share from his/her estate

Some reasons to consider a Buy and Sell Agreement. The agreement provides the business with a plan that would allow it to continue operating if one of the owners were to die or become permanently disabled. Without it the following problems may arise: Family members of the seller may become entitled to a share in the business by way of inheritance and may have no interest in or knowledge of the business. Potential buyers of the business interest may not be found. Large capital sums will be needed to fund the purchase of a deceased or disabled co-owner’s interest at a time when the buyer (s) is/are unable to raise sufficient finance.