1. Introduction
As a Singapore corporate lawyer, I have seen too many businesses face chaos when an owner departs unexpectedly, for example, due to death or permanent disability. Without a buy-sell agreement, your company risks:
(a) Costly legal battles among shareholders.
(b) Disrupted operations or forced fire-sale valuations.
(c) Heirs inheriting shares against the remaining owners’ wishes.
A well-drafted buy-sell agreement is your safeguard. It ensures a smooth transition, preserves business continuity, and protects stakeholders’ interests. Below, I will break down how it works and why Singapore business owners should act now.
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2. What Is a Buy-Sell Agreement?
A buy-sell agreement is a legally binding contract that regulates how ownership shares are transferred if a triggering event occurs (e.g., death or permanent disability). It addresses, amongst others, three critical issues:
(a) Who can buy the shares? (e.g., co-owners, the company, or any pre-approved third parties)
(b) At what price? (pre-agreed valuation methods prevent disputes)
(c) How is funding secured? (e.g., life insurance policies)
Without this agreement, your business is vulnerable to protracted disputes or even liquidation.
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3. Types of Buy-Sell Agreements in Singapore
(a) Cross-Purchase Agreement
(i) Best for: Small businesses with few owners.
(ii) How it works: Surviving owners buy the departing owner’s shares directly.
(iii) Key benefit: Maintains control within the existing ownership group.
(b) Entity-Purchase Agreement
(i) Best for: Larger companies or those with multiple shareholders.
(ii) How it works: The company itself buys back the shares.
(iii) Key benefit: Simplifies funding (e.g., via corporate-owned life insurance).
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4. Some Key Clauses You Should Have in Your Buy-Sell Agreement
(a) Triggering Events
Define the scenarios which activate the agreement, such as death or permanent disability.
(b) Valuation Mechanism
Avoid potential disputes over “fair price” by pre-setting:
(i) Fixed price (simple but may need updates by way of agreement from time to time).
(ii) Formula-based (e.g., EBITDA multiples).
(iii) Third-party appraisal (for complex businesses).
(c) Funding Solutions
(i) Life insurance: Ensures liquidity for buyouts (critical for SMEs).
(ii) Disability insurance: Covers incapacity scenarios.
(iii) Instalment plans: Eases financial strain on buyers.
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5. Why Singapore Businesses Need a Buy-Sell Agreement
(a) Prevent Costly Disputes
No ambiguity = fewer lawsuits.
(b) Protect Family & Heirs
Ensures fair compensation for a deceased owner’s family.
(c) Business Continuity
Avoids operational paralysis during transitions.
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6. Don’t Leave Your Business at Risk
Drafting a comprehensive buy-sell agreement requires expertise in Singapore corporate law. As a corporate lawyer who’s helped dozens of SMEs and founders, I can:
(a) Tailor the agreement to your business’s unique needs.
(b) Advise on any additional areas which business owners may overlook.
(c) Ensure enforceability under Singapore law.
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The author, Waltson Tan, is a corporate lawyer based in Singapore. He is qualified as an advocate and solicitor in Singapore and has more than eight years of post-qualification experience, including advising clients of top international and local law firms on corporate law and employment law-related matters.
Waltson also practises in the areas of mergers and acquisitions, private equity, joint ventures, investment funds, and other general corporate and commercial transactions. He has also represented numerous leading multinational organisations on a broad spectrum of corporate, regulatory, cross-border restructuring and employment matters.
Prior to joining the firm, Waltson practised at some of the top law firms in Singapore and thereafter, at a leading international law firm, which was the second largest law firm in the United States and one of the ten largest in the world.
Waltson Tan Director +65 8079 0028 waltson.tan@28falconlaw.com |
Office address: 101A Upper Cross Street #13-11, People’s Park Centre Singapore 058358 |