Buy and sell assurance is an agreement entered into between the shareholders to the effect that upon the death of a shareholder, the surviving shareholders are bound to purchase the shares from the deceased shareholder’s estate. The purchase price will be distributed by the executor to the heirs in terms of the will.
The time of death is an uncertain event and the shareholders are unable to plan so that they can save enough money to fund the purchase price.
A suitable and relatively inexpensive method of funding the purchase price is through life assurance where the shareholders insure the lives of each other and use the proceeds for the purchase price.
The benefits for the heirs of the deceased shareholder:
· Certainty regarding the purchasers of the deceased's shareholding.
· A negotiated equitable purchase price, which ensures that the full value of the deceased's shareholding will be passed on to his or her heirs.
· Payment of the purchase price in a cash lump sum, which will generate the income required by the heirs.
· No delays in winding up the estate.
The benefits for the surviving shareholders:
· Certainty regarding the future ownership of the company.
· No disputes with heirs as to a fair purchase price.
· The company can carry on business without disruption.
· A relatively inexpensive method of funding the purchase price.
· The payment of dividends to inactive shareholders is avoided.
The agreement may also provide for a sale of shares upon the permanent disability of a shareholder.
In order to ascertain the correct amount of life cover, the client needs to ascertain the market value of his or her shareholding in the business, as well as the amount of any outstanding loan accounts in his or her favour. The life cover should be reviewed regularly to ensure that it keeps in line with the growth of the business.A unilateral buy and sell agreement may be applicable where the obligation to purchase is not reciprocal and only one shareholder’s life is insured. Examples of this would be between a sole shareholder and an employee, or where the owner of a similar business wishes to purchase the shares.
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