When business co-owners prepare a shareholder or unit holder agreement, the focus is often on decision-making, voting rights, and distributions. What is too often overlooked is a clear pathway for what happens if a co-owner dies, suffers permanent disability, or otherwise exits unexpectedly.
Without a buy/sell option deed, the remaining co-owners and the family of the departing co-owner can be left exposed—facing disputes, mismatched valuations, and sometimes the forced sale or collapse of an otherwise thriving business.
A buy/sell option deed is the critical tool that ensures business continuity, protects the financial interests of all parties, and allows ownership to pass smoothly when the unexpected happens.
What is a Buy/Sell Option Deed?
A buy/sell option deed sets out the agreement between co-owners as to what happens to their interest if they exit the business due to:
- Death
- Total and permanent disability
- Critical illness, or
- Voluntary retirement or sale.
The deed obliges the departing co-owner (or their estate) to sell, and the remaining co-owners to buy, the business interest. It provides certainty: the business continues with those who can run it, and the family of the departing co-owner receives fair value.
Funding the Buyout: Insurance and Vendor Finance
The most effective way to fund a buy/sell arrangement is through insurance cover. Life, TPD and trauma policies provide an immediate source of cash to buy out the departing interest. However, insurance is not always available—for example, where a co-owner is older or has health conditions that prevent underwriting.
In those cases, the deed can include a vendor finance mechanism: the remaining co-owners agree to purchase the departing interest over time, with the estate or family receiving instalments on agreed terms. This ensures the transaction can still proceed, even where insurance cannot be obtained.
Why Structure Insurance and the Deed Together
A buy/sell deed without properly structured insurance can create poor tax outcomes or even fail to deliver the intended result. The ownership of the policy—whether self-owned, cross-owned, trust-owned, or company-owned—directly affects:
- Capital Gains Tax (CGT) concessions: Certain structures can preserve access to the small business CGT concessions, while others (e.g. company-owned cover) may compromise them.
- Premium funding: Some arrangements (such as superannuation ownership) allow premiums to be funded from pre-tax contributions, minimising cash flow impacts.
- Death benefit treatment: Insurance proceeds can be tax-free to dependants if structured correctly, but may be taxed where proceeds are distributed outside the dependant class or through the wrong structure.
In short, the deed and the funding strategy must be designed hand-in-hand to avoid unnecessary tax leakage and to ensure the intended beneficiaries actually receive the benefit.
Key Considerations
When preparing or reviewing a buy/sell option deed, co-owners should consider:
- Trigger events – Which events (death, TPD, critical illness, retirement, bankruptcy) will activate the deed?
- Valuation method – How will the business interest be valued to ensure fairness and avoid disputes?
- Funding mechanism – Will insurance, vendor finance, or a combination be used?
- Ownership of policies – Who owns the insurance, and how does this interact with tax and succession objectives?
- Alignment with other agreements – The deed should complement shareholder agreements, trust deeds and constitutions.
Protecting the Business and the Family
For business owners, succession planning is not just about who takes over management—it’s about ensuring the family of a departing co-owner is looked after, while the remaining co-owners retain control and continuity.
A buy/sell option deed, properly structured with insurance and funding in mind, is the best way to achieve that balance.
From Ledger & Law to Practice
This article expands on themes first published in our monthly accountant-focused newsletter, Ledger & Law – Passing the Torch. Ledger & Law highlights practical legal issues that affect accountants and their clients, from tax updates to succession planning. Click here to subscribe to Ledger & Law.
Disclaimer: The information in this article is general in nature and does not constitute legal, tax or financial advice. Every business and ownership structure is different, and careful tax structuring is essential before entering into a buy/sell option deed or arranging key person insurance. We recommend that business owners seek personalised legal and tax advice, and obtain financial advice from a licensed financial planner. At Thynne + Macartney, we regularly work alongside financial planners to ensure buy/sell and insurance arrangements are structured effectively for both business continuity and family protection.
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