Alex is Sprintlaw's co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
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If you have one or more co-owners in your company or family business, a buy sell agreement is one of the most practical risk management tools you can put in place.
It sets out exactly what happens to an owner’s shares or units if there’s a major life event-think death, permanent disability, critical illness, retirement, bankruptcy or a breakdown in the working relationship.
Without a clear plan, these events can leave your business in limbo, strain cash flow and spark disputes between founders and families. With a properly drafted agreement, the transition can be orderly, fair and funded.
In this guide, we’ll explain what a buy sell agreement is, the key clauses to include, how it fits with your broader ownership documents, and the practical steps to implement one in Australia.
What Is A Buy Sell Agreement?
A buy sell agreement (sometimes called a business succession agreement or a buyout deed) is a binding arrangement between co-owners that sets out when and how an owner’s equity must be bought or sold if a trigger event happens.
In a company, it governs the sale and purchase of shares. In a trust structure, it covers the transfer of units. It’s usually documented as a deed, and can stand alone or be incorporated into your broader ownership documents.
Most small businesses put their succession rules inside or alongside their core ownership agreement-so for companies, that’s your Shareholders Agreement and for unit trusts, that’s your Unitholders Agreement. Where the rules are complex, you might use a dedicated buy sell deed that sits beside those documents.
The aim is simple: if a trigger event occurs, everyone knows the process, price and timeline for the buyout-and there’s a plan for how to fund it.
Do You Really Need One, And When?
If you’re in business with others, the short answer is yes-you should have a buy sell agreement. Here’s why.
- Business continuity: A clear pathway keeps the business operating if a key person can’t keep working or passes away.
- Owner control: Remaining owners avoid being forced into business with a spouse, estate or third party who inherits the shares.
- Fair value: Pre-agreed valuation methods reduce arguments about price when emotions are high.
- Funding certainty: Insurance or staged payment mechanisms can be arranged in advance, protecting cash flow.
- Family peace: Your families know what will happen and when, which can prevent disputes at an already difficult time.
The best time to put one in place is when the relationship is healthy and before an issue arises-ideally at the same time you sign your Shareholders Agreement or trust deed. If you already operate without one, it’s never too late to fix that. You can also update the agreement as the business grows or owners change.
What Should It Include?
Every business is different, but most buy sell agreements cover similar ground. Below are the core areas to address (and why they matter).
Trigger Events
Define the events that force or allow a buyout. Common triggers include:
- Death of a shareholder
- Total and permanent disability (TPD)
- Critical illness or incapacity
- Retirement or voluntary exit
- Bankruptcy or insolvency
- Serious breach of duties or misconduct
Be clear about definitions (for example, what qualifies as TPD) and whether the buyout is automatic (mandatory) or optional (call/put option) for each trigger.
Valuation Method
Agree how the price will be set before a dispute can arise. Popular approaches include:
- Pre-agreed formula (e.g. EBITDA multiple)
- Independent valuation by a qualified valuer
- Average of two valuations, with a third appointed if the first two diverge
- Agreed price updated annually in writing
Whatever you choose, cross-check that it’s consistent with any pre-emption or pricing rules in your constitution and your valuing shares approach more broadly.
Funding The Buyout
Set out how the purchase price will be paid. Practical options include:
- Insurance-funded buyout (life and TPD policies matched to each owner’s interest)
- Staggered payments over time (vendor finance with interest and security)
- Company-funded buyback (subject to Corporations Act rules)
- Third-party finance (bank or private lenders)
Many businesses use insurance to cover death and TPD triggers and a payment plan for retirement or misconduct scenarios. Work with your accountant or adviser to align funding with tax and cash flow settings.
Mechanics And Timeline
Spell out the steps, notices and deadlines. For example:
- Who gives notice and when
- How the valuation process starts and by whom
- Deposit, completion and transfer timelines
- Security for any deferred payments
- What happens if a party doesn’t cooperate
Having a clear sequence keeps everyone accountable and avoids delays.
Pre-Emption, Options And Who Can Buy
Decide who has the right to buy first-other founders, the company, existing investors, or a nominated key employee. You can use call and put options or a cross-option structure so the transaction can proceed even if a seller’s estate is slow to act. If you expect different rounds or new investors, align this with your Company Constitution and any investor rights.
Restraints, Confidentiality And Handover
Include reasonable restraint clauses (non-compete and non-solicit), handover obligations and ongoing confidentiality to protect the business when a founder exits. The scope should be proportionate and tailored to your industry and geography.
Disputes And Deadlocks
Add a simple dispute resolution pathway (negotiation, mediation, expert determination) and consider deadlock mechanisms for co-founders with equal voting power. Clear processes can prevent costly litigation.
Documentation And Related Changes
Think about related documents the buyout will touch-loan accounts, personal guarantees, directorships and employee equity. If you’re using options, you may also need an Option Deed to record the grant terms clearly.
How Do You Set It Up The Right Way?
Putting a buy sell agreement in place doesn’t have to be complicated. Here’s a straightforward approach that works for most small businesses in Australia.
1) Map Your Ownership Structure
Confirm whether owners hold equity directly in a company or through a trust (as unitholders). This will drive the document format (shares vs units) and the way transfers happen. If you anticipate growth or investment, make sure your cap table and classes of shares are set up appropriately before you lock in the buyout rules. If relevant, review any different classes of shares you’ve created and how they interact with the buyout.
2) Choose Document Architecture
Decide whether to embed the rules inside your existing Shareholders Agreement or use a separate buy sell deed that cross-references it. A standalone deed can make insurance and option mechanics cleaner, while a single integrated document reduces duplication. Both approaches can work-consistency across your documents is what matters.
3) Align With Your Constitution And Existing Rights
Check for any pre-emption rights, transfer restrictions or director approval requirements in your Company Constitution. Your buy sell rules should sit neatly alongside these so there’s no ambiguity about who can buy, when and at what price.
4) Lock In Valuation And Funding
Agree the valuation method and how the price will be paid for each trigger. If you intend to use insurance, work with an adviser to size the policies to current value and review them annually. For deferred payments, specify the interest rate, repayment schedule and security (e.g. a share pledge or director guarantee, where appropriate).
5) Execute Properly (As A Deed) And Keep Records
Buy sell arrangements are usually executed as a deed rather than a simple contract because they often involve unilateral options and long timelines. If you’re formalising it as a deed, it’s important to follow proper execution rules under Australian law-our overview of what a deed is can help you understand why formality matters.
6) Implement The Mechanics
After signing, update your internal registers, board minutes and owner files. If you’ve put options in place, ensure notice templates are prepared. If you’re relying on insurance, confirm policy ownership and beneficiary structures match your agreement.
7) Review Annually
Set a calendar reminder to review valuation settings, business performance and insurance amounts every year or after any major change (new investor, acquisition, material jump in revenue). A short annual update can save big problems later.
If the process feels complex, it’s okay to get help-our team drafts these documents every week and can make sure your agreement meshes with your existing ownership structure and growth plans.
Valuation, Insurance And Funding Options
Valuation and funding are the parts of a buy sell agreement that most often create friction if they’re not thought through early. Here’s how to approach them pragmatically.
Valuation Choices
The “right” valuation method depends on your industry and stage. Early-stage startups might prefer an independent valuer with a flexible brief. Cash-generative SMEs often use a formula (for example, a multiple of normalised EBITDA or revenue).
Whichever path you choose, document the process clearly and consider how you’ll handle working capital, debt, one-off items and any minority discount. If you haven’t set a house view on valuation yet, it’s worth reading more about valuing shares and speak with your accountant so your buyout price reflects commercial reality.
Insurance-Funded Buyouts
Life and TPD insurance can provide the cash your business needs when a tragedy strikes. There are two common approaches:
- Self-ownership: Each owner holds a policy on their own life, and the agreement obliges the owner’s estate to sell shares to the remaining owners at the insured value (usually via cross-options).
- Business-ownership: The company or a trust holds policies on each owner. Payouts fund a buyback or purchase of the exiting owner’s equity.
The legal documents should mirror the insurance structure so funds flow as intended. Many businesses combine insurance for catastrophic events with staged payments for retirement or voluntary exits.
Deferred Payments And Security
If part of the price is paid over time, set out repayment terms, interest, and security clearly. Consider what happens if the buyer misses payments and whether the seller retains any rights over the shares until full payment is made.
Also plan the practicalities: who will step into director roles, how voting works during the payment period, and what information the seller receives until completion.
Share Transfers And Corporate Actions
When the time comes, the legal mechanics are fairly standard: the parties sign a transfer form, the board approves the transfer, and the register is updated. If you’re new to this process, our plain-English overview of how to transfer shares and how an off-market share transfer works in Australia can be helpful.
Don’t forget to tidy up related items such as director resignations, bank signatories and the release or assignment of any personal guarantees where possible.
Key Takeaways
- A buy sell agreement sets out when and how an owner’s equity is bought or sold after key events like death, disability or retirement, helping protect your business and relationships.
- You can embed buy sell rules into your core ownership documents-such as your Shareholders Agreement or Unitholders Agreement-or use a standalone deed, so long as everything aligns with your Company Constitution.
- Be specific about triggers, valuation, funding, timelines, restraints and dispute resolution to reduce disputes and keep the process smooth.
- Decide valuation and funding upfront-insurance for catastrophic events plus staged payments for other exits is a common, practical mix in Australia.
- Review the agreement and insurance amounts annually to keep pace with your business value and ownership changes.
- When it’s time to complete a buyout, the steps are straightforward-board approval, forms and register updates-but it’s wise to plan the share transfer mechanics in advance.
If you’d like a consultation on putting a buy sell agreement in place for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
