Buy-sell agreements

A buy-sell agreement — often buried as a clause inside a shareholders’ or partnership agreement — is a contract among the owners of a private business. On certain events, the affected owner or their estate must sell, and the remaining owners or the business must buy, at a price determined the way the agreement says.

That obligation on both sides is the whole point. Pre-emptive rights in a constitution usually give continuing shareholders the option to buy but require nobody to do anything. An option is not much use to a widow who needs the money, nor to the survivors if the estate decides to sit on the shares.

The insurance sits underneath. When the trigger event happens the policy pays, and that money funds the price the agreement has already fixed. If the lawyer writes the agreement and nobody funds it, the survivors are bound to buy something they cannot afford. If an adviser sells the policies and nobody writes the agreement, the proceeds arrive with no strings and the shares stay where they were.

Trigger events

Death is the easiest to draft. The others are where agreements are thin.

• Death — the estate must sell, the survivors must buy.
• Total and permanent disablement — needs a definition, a certifier and a waiting period.
• Serious illness — some agreements give the affected owner an option to sell rather than an obligation.
• Retirement at an agreed age, often on slower payment terms.
• Voluntary exit — the most common trigger in practice, and often drafted last and worst.
• Bankruptcy, insolvency, or a relationship property claim, where a compulsory-transfer clause keeps a stranger off the register.
• Loss of a professional licence, where holding one is a condition of ownership.

How the price is set

Three approaches, each with its own failure mode.

The funding gap

This is what catches good businesses. Five years ago three owners valued the company at a figure they thought generous, insured each stake at that number, and signed. The business has since grown substantially. The agreement, if it uses a formula or a current valuation, now obliges the survivors to pay today’s price. The policies still pay the old sum insured.

That difference falls on the surviving owners, in cash, just as the business has lost a third of its leadership. They borrow it, pay it out of the company over years, or renegotiate with a grieving family — the outcome the agreement existed to prevent.

These are the details that decide whether the cover does what you expected. Read them before you compare on price.

• Whether the agreement and the policies use the same trigger definitions. “Unable to perform their role” and “unable to perform any occupation” will not fire together.
• Whether the valuation clause has actually been operated. A schedule that has never been updated is worse than no schedule.
• How the price is paid if the insurance falls short — instalments, interest, security, and what happens if the business cannot keep up.
• Whether the agreement binds trustees where shares sit in a family trust, and whether the trust deed permits it.
• Whether spouses have signed where relationship property could give them a claim over the shares.
• Whether the agreement survives a change in shareholding. A new shareholder does not become a party automatically.

Every New Zealand insurer writes buy-sell funding cover to its own wording, and the words are where the money is. Two policies that look identical on price can pay very differently when it matters. Closing that gap is the entire job of an adviser.

• The adviser’s job is to make the funding match the document. One who has not read the agreement is guessing at the sum insured.
• Where cover is heavily loaded for one owner, an adviser can find which insurer takes that risk best, or flag the residual gap in writing.
• Indexation and scheduled increases can be built in so cover tracks a growing valuation rather than falling behind it.
• An adviser can set the annual review to land with your accountant’s year-end so the two numbers move together.

There are three ways to buy life cover in New Zealand, and they are not equivalent. You can buy direct from one insurer, which means you see one product range and one underwriting appetite. You can buy through your bank, which usually means a single insurer’s product sold under the bank’s brand, often with narrower definitions. Or you can go through an adviser, who quotes several insurers at once and is required to put your interests first.

The premium you pay is the same either way. Insurers build adviser commission into their pricing whether or not an adviser is involved, so going direct does not get you a discount — it just removes the person whose job is to argue your corner at application and at claim time.

• An adviser can see which insurer is currently taking your health history on standard terms, and which one will load or exclude it.
• An adviser can structure cover across two insurers if that produces a better outcome than putting everything with one.
• An adviser handles the underwriting back-and-forth, and is the person who chases the claim when a family is least able to.
• An adviser has to document why the recommendation suits you, which is a written record you can hold them to.

We are a referral service, not an insurer. We do not quote premiums and we do not sell policies. What we do is put you in front of one licensed New Zealand adviser who can compare the market properly.

1. 1

   You tell us what you are looking at

   The form takes about a minute. Nobody asks for your medical history on a web form — that conversation happens with the adviser, properly, and only once you have decided to proceed.

2. 2

   An adviser calls you

   A licensed New Zealand adviser talks through your situation: who depends on you, what you owe, what you already have in place, and what you are actually worried about.

3. 3

   They compare the market

   The adviser quotes across the major insurers, checks which of them will take your health history on the best terms, and puts the options side by side in writing.

4. 4

   You decide, in your own time

   There is no obligation and no cost to you. If the answer is that you already have enough cover, a good adviser will tell you that.