Buy-Sell Agreement Singapore
What Is A Buy-Sell Agreement?
A Buy-Sell Agreement, also be known as a Buyout Agreement or Buy & Sell Agreement, is a contractual document that legally bind between parties during buying or selling of business upon a trigger event. The agreement will spell out beforehand what is to be done upon the trigger event.
Examples of a trigger events are:
Death, retirement, bankruptcy, total and permanent disability or critical illnesses of a business owner.
The most common type of Buy-Sell Agreement involves funding from insurance policies so that the proceeds from the policy will be paid to the departing business owner during the trigger event.
What Are The Common Type Of Buy-Sell Agreements?
1. Entity Buy-Sell Agreement
This type of agreement involves the entity or company itself. It will allow the business owners to transfer the shares to the entity upon the trigger event.
When a trigger event happens to one of the business owners such as death or retirement, the entity will buy over the shares from the outgoing owner as prior arrangement stated in the Buy-Sell Agreement.
The entity will purchase and fund an insurance policy on the life of the business owners and the owner of the policy is the entity.
Upon the trigger event, the proceeds from the policy will be paid to the entity so that the entity can use the proceeds to purchase the shares from the outgoing shareholder.
It is essential to determine the amount to insure through a detailed business succession plan through estate planning.
2. Cross-Purchase Buy-Sell Agreement
The cross-purchase Buy-Sell Agreement is the most common type of agreement because it’s straight forward.
In the nutshell, it is the selling of shares from the outgoing business owners to the remaining business owners.
An example will be that if there are 2 business owners of which each of them holds 50% shares.
When one of them depart due to any of the trigger events, the surviving business owner will buy over the 50% share and holds 100% after executing the Cross-Purchase Buy-Sell Agreement.
If there are more than 2 business owners, they will usually purchase a proportion amount of shares from the outgoing business owners.
Let’s take a look at ABC Pte Ltd with Shareholder A, B and C with 30%, 30% and 40% respectively.
Upon departing of Shareholder C, the shares will be split proportionally to the rest of the remaining business owners.
In this case, Shareholder A will hold 50% = 30% + 20% (from Shareholder C).
Shareholder B will hold 50% = 30% + 20% (from Shareholder C).
How do Shareholder A and B buy the shares from Shareholder C?
All 3 shareholders have to purchase insurance policies on each other’s life. Example, Shareholder A has to purchase 2 policies on each of the life of Shareholder B and C. Upon the occurrence of the trigger event such as the death of Shareholder C, the proceeds from the insurance policy that Shareholder A and B buy on Shareholder C will be paid to Shareholder A and B to buy over the shares from Shareholder C.
3. Proportionate Cross-Purchase Buy-Sell Agreement
This method is used when the different business owners own different percentages of the shares and when taking over from the departing business owner, they want the same proportion based on their share ownership in the business.
Using the same example as above that Shareholder A, B and C hold 30%, 30% and 40% respectively.
Upon Shareholder B’s departure and Shareholder A and C will purchase 12.86% (3/7 of 30%) and 17.14% (4/7 of 30%) respectively.
Number of Insurance Policies Needed To Fund Buy-Sell Agreement
Entity Buy-Sell Agreement: The entity will be the policy owner and each of the business owners are the insured. So, if there are 5 business owners then there will be 5 policies.
Cross-Purchase or Proportionate Cross-Purchase Buy-Sell Agreement: The number of policies depends on the number of business owners involved.
If the business have 2 owners, A and B, then it will require 2 policies:
- A owns B’s policy
- B owns A’s policy
If the business have 3 owners, A, B and C, then it will require 6 policies:
- A owns B’s policy
- A owns C’s policy
- B owns A’s policy
- B owns C’s policy
- C owns A’s policy
- C owns B’s policy
You may use the following formula to calculate the number of policies needed for Buy-Sell Agreement:
n x ( n – 1 ), where n is the number of business owners.
What Can The Buy-Sell Agreement Be Used For?
The agreement is mainly used for businesses and companies that are looking to plan for succession of business to another person (may or may not be in the business per se).
A discussion with an estate planner will be helpful to determine your goal and succession strategy.
If a business owner is looking into retirement planning, the Buy-Sell Agreement will be one of the instrument to make sure that upon retirement, he/she will receive a retirement fund from the business.
If a business owner is looking into legacy planning, the Buy-Sell Agreement will allow the business owner to leave a legacy for the next generation.
If a company is looking for keyman insurance, they have to consider who is going to succeed the business and the Buy-Sell Agreement will dictate what will happen upon the death or disability of the key person.
Want To Setup A Buy-Sell Agreement For Your Business?
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