If a business has more than one owner, the owners commonly choose a plan for succession through a buy sell agreement. This document sets out what will happen to the business when certain triggering events occur such as death, disability or retirement.

The agreement provides a legal mechanism by which certainty is created for the continuing business owners to purchase the outgoing owner's share of the business and for the outgoing owner (or the estate) to be paid a fair value for the share.

It affords an opportunity for all stakeholders to set the value to be received for their respective share at a time when they don't know who will be bought out. The parties therefore are attempting to set a fair value or formula on neutral terms.

There are essentially 5 types of buy/sell structures but, widely recognized as the most efficient method is the exchange of put and call options.

The agreement should also address the following key points.

Generally speaking, life insurance can provide all or part of the necessary funds to allow business owners to satisfy their obligations under the agreement should an insurance related triggering event occur such as death or disability. This should prevent the need for continuing owners to borrow money, liquidate assets or deplete the reserves of the business.

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