01
Determine the business value
The business owners agree on an appropriate valuation method, supported by professional input where necessary.
Business and insurance
Protect Your Business. Protect Your Partners. Protect Your Legacy.
If a business owner dies, the remaining owners and the deceased owner’s family may face difficult decisions about ownership and money. A buy-and-sell agreement can set out who will buy the deceased owner’s interest, how its value will be determined and how the purchase will be funded. Life insurance may help provide that funding. The legal agreement and insurance policy are separate and must be structured to work together.
The agreement and the life insurance policy are separate. They need to be arranged so that they work together.
What is a buy-and-sell agreement?
A buy-and-sell agreement is a legal arrangement between business owners that sets out what should happen to an owner’s interest in the business when certain events occur.
For example, if one business partner passes away, the agreement may require the surviving partner to purchase the deceased partner’s ownership interest.
The agreement typically explains how the ownership interest will be valued, who will purchase it and how the purchase will take place.
Life insurance can sometimes provide the funds needed to complete that purchase.
How does it work?
The legal structure and the tax treatment must be assessed for the particular business. These steps are an outline, not a completed agreement.
02
Establish ownership percentages
Identify each owner’s shareholding, partnership interest or other relevant ownership rights.
03
Agree on succession arrangements
A legal agreement establishes the circumstances under which an ownership interest must or may be transferred.
04
Consider funding
Appropriately structured life insurance or other funding arrangements may provide money for the purchase.
05
Implement and review
The agreement, valuation and funding arrangements are implemented and reviewed as circumstances change.
A simple ownership illustration
Enter an estimated value for the owners’ combined interest in the business, each owner’s percentage and any funding already available. The tool shows an illustrative ownership value and possible funding gap. Do not use annual turnover as the business value.
Use the estimated value attributable to the owners after appropriate liabilities and valuation adjustments. Do not enter annual turnover.
- Enter the estimated business equity value, or 0.
- Enter a percentage from 0 to 100 for Owner 1.
- Enter a percentage from 0 to 100 for Owner 2.
This calculator provides a simplified illustration based on the business value and ownership information entered by the user. It does not constitute a professional business valuation, insurance quotation, tax calculation or legal recommendation. Actual ownership values and funding requirements depend on the business structure, valuation methodology, shareholder agreements, liabilities, shareholder loan accounts, tax consequences and other circumstances. Any buy-and-sell arrangement and related insurance funding should be reviewed by appropriately qualified professionals.
Important considerations
Business valuation
The value of a business can change. An agreement should provide an appropriate way to arrive at that value when it is needed.
Life insurance funding
Life insurance can sometimes provide money for the purchase, so surviving owners are not forced to use operating cash or sell business assets. The policy and the agreement are separate, and they need to work together.
Shareholder and partnership agreements
The legal agreement must match the actual ownership structure and the business’s constitutional documents.
Estate duty and tax
Insurance and ownership transfers can have estate duty, capital gains tax and other tax consequences. Buy-and-sell proceeds are not automatically excluded from estate duty.
Disability and other exit events
Some agreements address disability, retirement or other departures. The funding and the contract have to be structured for those events. They are not covered merely because death has been considered.
Business continuity
The business still needs to keep operating while ownership is being transferred.
This calculator provides a simplified illustration based on the business value and ownership information entered by the user. It does not constitute a professional business valuation, insurance quotation, tax calculation or legal recommendation. Actual ownership values and funding requirements depend on the business structure, valuation methodology, shareholder agreements, liabilities, shareholder loan accounts, tax consequences and other circumstances. Any buy-and-sell arrangement and related insurance funding should be reviewed by appropriately qualified professionals.