At Orbital Life, we regularly collaborate with experts in adjacent fields to ensure our clients receive well-rounded strategic advice. One of our key partners is Hitch Advisory, a specialist legal firm with expertise in shareholder and unit holder structuring, including the documentation and implementation of buy sell arrangements.
Buy sell deeds are often underpinned by life insurance policies, and for the arrangement to work as intended, the legal documentation must align closely with the insurance structure. If the documents are not in sync, the arrangement may not deliver on its purpose – potentially causing financial and operational distress at a critical time.
We spoke with Paul Henry, Principal at Hitch Advisory, about the fundamentals of buy sell arrangements – how they work, why they matter and what to consider if you’re currently in or establishing a business partnership.
Can you give us an example to explain the concept of buy sell?
Let’s say two founders set up a business together. Early on, both are instrumental to its success. As the business grows, it builds value – and then, suddenly, one of the founders unfortunately passes away.
Without an agreement in place, their share in the business would likely pass to their estate – often a spouse or family members who may not be equipped to contribute to the business or work harmoniously with the surviving founder.
The ideal outcome is for the deceased founder’s family to receive fair value for their share, and for the surviving founder to retain operational control. That’s where a buy sell agreement – funded by insurance – comes in.
The agreement outlines that, in the event of death or permanent disability, the insured amount is paid out and used to purchase the departing party’s share. This ensures the family is looked after, the surviving founder gains full ownership, and the business can continue without major disruption.
Without this structure, the surviving founder may need to borrow significant funds or sell assets – putting the future of the business at risk. A buy sell arrangement is ultimately about preparing for the worst, so that if it does happen, everyone involved has clarity, protection, and peace of mind.
When should business owners set this up?
Ideally, from the very beginning. Every business should have a shareholders’, unit holders’ or partnership agreement – and that’s often the right place to include buy sell provisions. Alternatively, a standalone buy sell deed can be created.
We know many start-ups are “bootstrapping” and delaying this sort of documentation, but the risks increase the longer it’s left. As the saying goes: the best time to put a buy sell agreement in place was yesterday. The second-best time is today.
Getting this done early – when everyone is on good terms and there’s no urgency – is always best. Once agreed upon, Hitch works closely with Nick and the Orbital Life team to determine the appropriate insurance policies to fund the arrangement.
This gives all parties peace of mind that their years of hard work building equity in the business won’t go unrewarded – and their family won’t be left vulnerable should the worst occur.
Are there different ways to structure the insurance?
Yes – and it’s important to consider who holds the insurance policy: the individual, the business, or a trust.
The simplest and most direct approach is for each individual to hold their own policy. That way, the insurance benefit is paid to the individual or their estate, and the shares can be transferred in line with the buy sell agreement. When the policy is held by the business or a trust, additional steps or tax implications may arise.
The structure should be tailored to the specific goals and circumstances of the business and its owners. Hitch Advisory and Orbital Life work together to help clients understand the options and implement the most efficient structure.
For more information on buy sell funding and ownership structures, Orbital Life has created an initial guide here.
How do we determine the right insurance amount?
Valuation is one of the most critical components. If the insurance payout doesn’t reflect the true value of the departing partner’s shares or units, then the buyout won’t be fair – and could create more problems than it solves.
There are two common approaches:
- Agreed valuation mechanism – for example, five times EBITDA. It’s simple, based on metrics from the company’s books, and can be implemented easily.
- Periodic independent valuation – typically reviewed annually. This provides a more accurate and market-aligned figure but comes with cost and administration.
There’s no universal right answer – it depends on the nature of the business, its growth trajectory and the founders’ appetite for cost and complexity. What matters is ensuring the valuation is agreed upon up front and reviewed regularly to keep pace with changes in business value.
If I’ve only skimmed this article, what should I take away?
A buy sell agreement is about protecting both the business and the people behind it.
It ensures that if the unthinkable happens, the surviving founder can continue to run the business with certainty – and the affected family receives fair value quickly and efficiently.
The right structure, paired with appropriate insurance, allows all parties to plan for the future with confidence. It’s about protecting the integrity of the business, the relationship between partners, and the financial wellbeing of their families.
To explore the right structure for your business, contact Nick at Orbital Life or Paul at Hitch Advisory.