Partner Buy/Sell Arrangements
What is it?
Partner Buy-Out insurance is the “funding” portion of a two step process in putting together a Buy/Sell Agreement between two or more persons for the orderly transfer of the portion of equity which currently belongs to each partner/shareholder.
It is necessary to have this funding mechanism in place for unplanned exit strategies in the form of death or disability
The two steps
Funding - a method other than cash or borrowings used to purchase the other parties equity in a business.
Transfer - this is the legal agreement between business proprietors dealing with the orderly transfer of equity in the event of, for instance, death, disablement or critical illness.
Unlike a sale in the ordinary course of a business, the continuing proprietor might be unable to raise the necessary finance to buy his partner in the event of a major insurable event, i.e:
Total & Permanent Disability
A medical condition (Trauma) not resulting in Death or Total & Permanent Disablement.
Buy/Sell contracts are usually prepared by lawyers and reflect the inter-relationship between business entities and the principals, the insurance needs, the value of the business and the equity position and the terms under which any transfer of equity is triggered.
Why do I need it?
At some stage of a business an event will occur (apart from bankruptcy or exit) which will result in the requirement of business partners to raise capital to effect a buy-out of the outgoing partner. This is done either by:
Funding the buy-out using buy/sell insurance agreements
The choice is yours; the stressful, disorganised and hasty raising of capital or the simple, orderly and hassle-free transfer and partner buy-out that this type of agreement/insurance can provide?
How much cover do I need?
This is normally calculated in a joint discussion between a Business Valuer, the Accountant, the Partner and the Insurance Broker if he/she is sufficiently qualified to provide this advice.
Give our office a call for assistance with calculating the levels of cover required for each party involved in the agreement - 02 9633 5530
Please note that this information is general advice only. Please click here for more information.