A buy-and-sell agreement is an agreement among the members of a business entity, obligating themselves on their deaths or in the event of disability, to sell their interest to the survivors and likewise committing the survivors to purchase the deceased member's interest. In most cases, the personal assets of the various partners are tied up in the firm, as profits are often kept in the business. Life assurance is the only safe and sound way of creating the necessary funds in terms of the agreement.

The Solution

The members / partners / shareholders enter into a contract in terms of which they affect policies on each other's lives, (View Example of 4 owners on a company value of R10 million). The co-owners other than the assured should therefore pay the premiums. If a credit loan account exists, such a loan account can then be included in the buy-and-sell agreement by including the loan account amount in the cover on the life of the person to whom the loan is owed (creditor).

The benefits of a Buy & Sell agreement

In the absence of a bona fide agreement the surviving members / partners / shareholders may find themselves faced with serious problems. Such an agreement, funded by insurance, provides the ready cash the moment it is needed. The Buy-and-Sell agreement eliminates uncertainty , since the surviving partner/s pay/s fair value for the acquired share of the business and hence the needs of the deceased partner's heirs are also met. It gives the surviving owners immediate, full and unhindered ownership of the business. It prevents the business from being drained of its capital resources. Instead of borrowing money and paying 100c in the Rand plus interest, a life policy is usually much cheaper and readily available. 

TAX

No tax deduction applies to the premiums paid but the proceeds will be tax-free. 

Estate Duty Implications

There are no estate duty implications in respect of the proceeds of the policies, provided that the provisions of sect. 3(3)(a) of the Estate Duty Act are complied with, ie: policies effected or acquired for the purpose of funding a buy-and-sell agreement between partners in a partnership, co-shareholders in a company or co-members of a close corporation (sect. 3(3)(a), provided that:

• The policy was taken out or acquired by a person who on the date of the deceased's death is a partner, a co-shareholder or a co-member;
• No part of the premium under the policy was paid or borne by the deceased.  

Conclusion

A binding Buy-and-Sell agreement, properly funded by life assurance, is the only safe arrangement that will guarantee that ready cash is immediately available when death occurs. It is also the only sound means of providing in advance for protection against an event that may disrupt the entire business. All PTY LTD, CC, Franchisee / Franchisor entities should have a buy and sell in place. In a publicly listed company on the stock exchange you would need to have "Key Person" cover in place instead of a buy and sell agreement.