Legal Comment by Mark Illidge 

Every business with two or more owners should consider what would happen to the business if one of the owners left due to death or extended illness.

If the correct insurances and legal agreements are not put in place, the business owner (or, in the case of death, his/her estate) can demand the business be wound-up to pay out their interest in the business and/or to repay loan balances. The estate may also insist on immediate and direct involvement in the control and operation of the business. In the event of total and permanent disability, or one of the owners suffering a trauma event (eg. cancer), there may be uncertainty over the likelihood of the business owner recovering or ever returning to work. As a result, the continuing business owner/s may end up doing all of the work, but are still forced to release income and profits to the non-working owner.

A Buy/Sell Agreement sets out what will happen to the business when a ‘trigger event’ occurs. A trigger event can include: Death; Total and Permanent Disablement (TPD); or Trauma. Put and call options within the Buy/Sell Agreement can then ensure the transfer of the business is done correctly.

A put option allows the estate to ‘put’ the business to the surviving owner that legally binds that surviving owner to buy.

A call option allows the surviving owner to ‘call’ upon the ceasing owner to transfer the business interest and legally binds them to sell. The transfer is carried out at a price determined under the agreement that is fair to all owners.

By holding term life, TPD and trauma insurance, you are able to fund the transfer of the business in accordance with a trigger event listed in your Buy/Sell Agreement. Therefore, you will not have to fund the purchase yourself or worry about having to take on additional loans or interest.

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