Buy/Sell Option Agreements & being a Sole Proprietor

What is a buy/sell option agreement?

A buy/sell option agreement is a contractual arrangement between the proprietors of a business under which a proprietor’s interest in the business will transfer to the other proprietors, upon the occurrence of a specified trigger event (for example death, total and permanent disability (TPD) or a trauma event of an outgoing proprietor). The proprietor’s interest may be in the form of a partnership interest, shares in a company or units in a unit trust.

  • Buy/sell option agreements generally deal with involuntary (unplanned) trigger events (i.e. death, TPD or a trauma event) as opposed to voluntary/ planned trigger events such as retirement, resignation, personal bankruptcy, or breach of a shareholder/unit holders agreement.
  • The transfer of interest is funded by way of proceeds from insurance cover held by or on behalf of the proprietors.
  • The optional aspect of the agreement enables a buy/sell arrangement to be adopted by use of:
    • A ‘put’ option (also known as a ‘sell’ option) whereby an outgoing proprietor (or their estate) has the right to require that their interest in the business be acquired by the ongoing proprietors, and
    • A ‘call’ option (also known as a ‘buy’ option) whereby the ongoing proprietors have the right to acquire the interest in the business held by the outgoing proprietor.

Advantages of buy/sell option agreements

  • Minimise uncertainty for the business operation.
  • Provide funding for a change in ownership interest.
  • Avoids an undesirable situation where ongoing proprietor cannot buy out the outgoing proprietor and could even end up with an outgoing proprietor’s spouse somehow stepping in and performing the outgoing proprietor’s role, where that spouse has no skills in the area concerned (it happens!).
  • Clarity for the trustees of a deceased proprietor’s estate.

For more further information regarding Buy/Sell Option Agreements, or if you are a sole proprietor and need advise on issues to consider such as shares, units, loans, taxation, insurance, etc. please download our information sheet on Business Succession Planning and contact our office on 9550 4600.