Buy Sell Agreement Singapore
Looking for a Buy-Sell Agreement?
What are the different types of Buy-Sell Agreement for my business?
How can life insurance fund for the Buy-Sell Agreement?
We will give you all the relevant information to help you make a more informed decision about Buy-Sell Agreement so that your business is/are secured.
What Is A Buy-Sell Agreement?
A Buy-Sell Agreement can also be known as a Buyout Agreement or Buy & Sell Agreement.
It is a contractual document that legally bind between parties during buying or selling of business upon a trigger event.
Some examples of a trigger events are:
Death, total and permanent disability, critical illnesses, retirement or bankruptcy of a business owner.
After a careful business succession planning and estate planning for both the business and business owners, the Buy-Sell Agreement is the contractual agreement between parties involve in the business. Upon the departure of a business owner, the agreement will spell out beforehand what is to be done upon the trigger event.
The most common type of Buy-Sell Agreement is funded by an insurance policy so that during the trigger event, the proceeds from the policy will be paid to the departing business owner.
What Are The Common Type Of Buy-Sell Agreements?
Here are different types of Buy-Sell Agreements:
Entity Buy-Sell Agreement
As the name implies, this type of Buy-Sell Agreement involves the entity or company itself.
It usually involve several business owners in the entity and this Buy-Sell Agreement will allow the entity to buy over the shares of the departing business owner.
When a trigger event like death, permanent disability or retirement happen to one of the owners, the entity will buy over the shares from the outgoing owner as prior arrangement stated in the Buy-Sell Agreement.
Often, 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 payout of the policy will be paid to the entity so that the entity can use the proceeds to purchase the shares from the outgoing shareholder.
Often, a detailed succession plan and estate planning of the outgoing shareholder is essential to determine the sum assured to cover in the insurance policy.
Cross-Purchase Buy-Sell Agreement
The cross-purchase Buy-Sell Agreement is the most common type of Buy-Sell Agreement because of its straight forwardness.
Basically, 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 triggered events, then 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 30% + 20% ( from Shareholder C) = 50%.
Shareholder B will hold 30% + 20% (from Shareholder C) = 50%.
From the above case, when Shareholder C is the departing business owner and Shareholder A and B is the remaining business owner.
Shareholder A and B will purchase an insurance contract and is the owner of the policy. The life assured, meaning, the person that is being insured is Shareholder C.
This is so that upon the occurrence of the triggered event, example death of Shareholder C, then the proceeds from the insurance policy will be paid to Shareholder A and B to buy over the shares from Shareholder C.
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 holds 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: For this 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: For this kind of 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 Buy-Sell Agreement is mainly used for businesses and companies that is looking to plan for succession of business to another person (may or may not be in the business per se).
This agreement is a very important tool for some of the personal financial planning.
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.
About Financialogy SG
We are a professional financial planner that specialises in business succession planning and business insurance. Together with our preferred partner, we provide a one-stop solution and assist in holistic planning for your business and your business partners.
So, if you have other heart burning questions, please do contact us or leave your details below and we will connect with you in the shortest possible time.
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