Buy and sell agreements are an essential tool for protecting business interests and ensuring a smooth transition of ownership in South Africa. In this article, we'll explore the importance of buy and sell agreements, their legal requirements and how they can protect business interests and ensure a successful transition of ownership.

What is a Buy & Sell Agreement?

A buy and sell agreement (also called a buy-sell agreement or buyout agreement) is a legally binding document between two business parties (e.g. partners, shareholders, co-owners) that govern how the business interests (e.g. shares, members interest, partners share) are treated if a trigger event occurs e.g. one party dies unexpectedly.

Each shareholder takes out life cover on the other shareholders’ lives and the life cover pays out on the death of a shareholder which funds the purchase of his/her shares by the surviving shareholder/s.

A buy and sell agreement may be contained in a shareholder agreement, partnership agreement or in any other agreement for that purpose.

Types of Buy & Sell Agreements

The most common ways in which buy-sell agreements are structured are:

• by way of a cross-purchase: this is where the remaining owners purchase the share of the business that is for sale.

• by way of redemption: this is where the business entity itself buys the share of the business;

• a combination of cross-purchase and redemption.

Why are Buy and Sell Agreements Important?

Buy and sell agreements are important for several reasons. First, they help to ensure a smooth transition of ownership in the event of certain triggering events, such as the death or disability of a business owner. By having a clear plan in place, businesses can avoid disputes and ensure that ownership is transferred in a timely and efficient manner.

Second, buy and sell agreements can help to protect business interests by preventing unwanted third-party ownership or control of the business. The agreement can outline the circumstances under which ownership can be transferred and to whom, helping to ensure that the business remains in the hands of trusted parties.

Legal Requirements for Buy and Sell Agreements

In South Africa, buy and sell agreements must comply with the requirements of the Companies Act of 2008, which outlines the legal framework for company formation and governance. The agreement must be in writing and signed by all parties, and must comply with the rules and regulations governing the transfer of ownership of the business.

The agreement should also include provisions for the valuation of the business and the payment terms for the purchase price, as well as the process for resolving disputes and addressing any issues that may arise during the buyout process.

Funding a Buyout Agreement

A buyout agreement can be backed by way of an insurance policy or by borrowing funds from a commercial bank to buy the deceased owner’s share. The most common and affordable way to fund a buy-out is by way of insurance policy.

Conclusion

Buy and sell agreements are an essential tool for protecting business interests and ensuring a smooth transition of ownership in South Africa. By having a clear plan in place, businesses can avoid disputes and ensure that ownership is transferred in a timely and efficient manner. With the right legal guidance, businesses can develop a buy and sell agreement that meets their specific needs and provides the protection they need to succeed.

Barter McKellar’s corporate attorneys have extensive experience advising on and drafting, negotiating and reviewing buy and sell agreement and advising on succession planning for business enterprises. If you would like to find out more, contact our offices today to schedule a consultation with one of our specialist corporate law attorneys.