If you own a business with a partner, a buy-and-sell agreement is one of the most important documents you don't have. Here's what it does, why it matters, and what happens without one.

Most business owners spend considerable energy protecting their business from external threats — market competition, cash flow, key contracts. Very few have protected it from one of the most predictable risks of all: what happens if one of the owners dies.

A buy-and-sell agreement is a legal contract designed to answer exactly that question — and to answer it before the crisis happens, when everyone is calm, aligned, and thinking clearly.

What a Buy-and-Sell Agreement Actually Does

In its simplest form, a buy-and-sell agreement is a contract between business co-owners that determines what happens to a deceased or disabled owner's share of the business.

Without one, the default position under South African law is that the deceased owner's share passes to their estate — and from there, to their heirs. Which means that your business partner's spouse, children, or other heirs may become your new business partners, whether any of you want that or not.

A buy-and-sell agreement prevents this by establishing, in advance:

• That the surviving owners will purchase the deceased owner's share
• At a pre-agreed valuation method — removing the need for a disputed valuation at the worst possible time
• Funded by life assurance — so the money to buy the share is available immediately, without the surviving owners needing to find cash or take on debt

The result is clean and certain: the deceased owner's family receives fair value for their share of the business in cash, and the surviving owners retain full control of the business they built.

How It Is Funded

The mechanism that makes a buy-and-sell agreement work in practice is life assurance. Each owner takes out a life policy on the other owner's life — in an amount equal to their share of the business value. When one owner dies, the policy pays out to the surviving owner, who uses those proceeds to purchase the deceased's share from the estate.

This structure ensures that:

• The surviving owners have liquidity immediately — no need to borrow, liquidate assets, or bring in an unwanted third party
• The deceased owner's family receives fair value — they are not forced to accept a distressed sale price or remain invested in a business they cannot run
• The business continues without disruption — ownership is resolved quickly and cleanly

What Happens Without One

The absence of a buy-and-sell agreement creates a business continuity crisis at the worst possible moment.

Scenario 1 — The unwilling heir
Your business partner dies. His 40% share passes to his wife, who has no interest in the business and no understanding of its operations. She is now your co-owner. She cannot be removed without her consent. She is entitled to her share of profits. She may want to sell — at a price and timeline that suits her, not you.

Scenario 2 — The forced sale
With no agreement and no liquidity mechanism, the only way to resolve the situation may be a forced sale of the entire business — often at significantly below market value — to give the estate its share. Years of building the business, liquidated under pressure.

Scenario 3 — The valuation dispute
Without a pre-agreed valuation methodology, the deceased's estate and the surviving owners are likely to have very different views on what the business is worth. Resolving this through negotiation — or litigation — takes time, money, and goodwill that the business may not survive.

The Legal Agreement is as Important as the Assurance

This is where many business assurance arrangements fall short. A life policy without a legally binding buy-and-sell agreement is not a solution. The policy provides the money. The agreement determines how that money is used and what rights and obligations it creates.

The agreement needs to address:

• The valuation methodology — how the business will be valued at the time of death (fixed amount, formula, or independent valuation)
• Trigger events — death, permanent disability, critical illness, or retirement
• Tax implications — the ownership structure of the policies affects how proceeds are taxed
• Alignment with the shareholders' agreement — the buy-and-sell agreement must work with, not against, any existing shareholders' agreement

Getting these details right requires both financial and legal expertise. As a CFP® with an LLB, I draft and review these agreements with the precision that both disciplines require — not just the assurance structure, but the legal document that makes it enforceable.

Do You Actually Need One?

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Shaun Dalton CFP® | Postgraduate Diploma in Investment Planning | LLB
Efficient Wealth — Authorised FSP 655 | Potchefstroom