Buy-and-Sell Agreements for Professional Practices
How doctors, attorneys, accountants and other professionals in practice together use life cover to fund the buy-out of a deceased or disabled co-owner — and how to structure it so the proceeds escape estate duty, capital gains tax and income tax
Written by
Martin Kotze
Attorney, Conveyancer & Notary Public
Last reviewed:
Contents
What Happens Without One
Start with the scenario the agreement exists to prevent. Three professionals own a practice in equal shares. One dies unexpectedly.
The deceased’s shares do not disappear — they fall into the deceased estate, under the control of an executor who may take months to be appointed and who owes duties to the heirs, not to the practice. Under the common law, the death of a partner dissolves a partnership entirely, leaving the survivors to wind it up or reconstitute it. In a company or close corporation, the survivors suddenly have the estate — and behind it, the family — as their co-owner.
From there, three problems compound.
The family holds value it cannot use
The practice interest is often the largest asset in the estate, but it produces no cash for the household — and in a professional practice the heirs are usually legally barred from keeping it. The estate holds valuable but unsellable paper at the very moment the family needs liquidity for estate duty, executor’s fees and living expenses.
The survivors face a purchase they cannot fund
Even where everyone agrees the survivors should buy, few professionals keep the price of a third of a practice in cash. Bank finance at the worst possible moment, or a drawn-out instalment sale, drains the practice exactly when it has lost a fee-earner.
Nobody is obliged to do anything
Without a binding agreement the executor may hold out for a better price, the survivors may lowball the family, and the statutory default rules take over.
Eighteen years of deadlock
In Davidson v Cough N.O. and Others (41962/2021) [2022] ZAGPJHC 1007 a member of two close corporations died in 2004. His interests were never transferred or sold as section 35 of the Close Corporations Act 69 of 1984 requires, and the resulting deadlock between his widow and the surviving member took almost eighteen years and a High Court application to resolve.
“It therefore makes absolute sense for the deceased member’s interest to be sold to the corporation or to the remaining members to avoid bringing a total stranger into the business.”
A funded buy-and-sell agreement answers all three problems at once: a compulsory sale, at a fair pre-agreed price, with the purchase money delivered by an insurer within weeks of death — outside the estate, untouched by executor’s fees, and (if structured correctly) untouched by estate duty, capital gains tax or income tax.
The Two Legs: An Agreement Plus Funding
A buy-and-sell arrangement has two legs, and it fails if either is missing.
The first leg is the agreement
A binding contract in which each co-owner undertakes, now, while everyone is alive and insurable, that on a trigger event the survivors will buy and the affected owner or their estate will sell. An agreement without funding is an empty promise: the obligation to buy exists but the money does not.
The second leg is the funding
The life and disability policies, sized to the value of each owner’s interest. Policies without an agreement are just cash: the survivors receive a payout but nothing obliges the estate to sell them the shares and nothing fixes the price — and without the agreement and its recorded purpose, the proceeds are also deemed property in the deceased’s estate and taxed there.
Where this goes next. The funding leg — who owns each policy, whose life it insures and who pays the premiums — is where most arrangements are won or lost. That is covered in detail on the funding structure and the premium traps.
Is the Arrangement Even Valid?
South African law refuses to enforce a pactum successorium — a contract that tries to regulate succession to a person’s assets on death outside a will. A badly drafted buy-and-sell can stray into that territory.
In McAlpine v McAlpine NO and Another (299/95) [1996] ZASCA 127; 1997 (1) SA 736 (SCA), two brothers who each held 50% of a property-owning company agreed that on the death of either, the survivor “will get 100% of the shares” — no purchase price, no sale, just survivorship. The then Appellate Division struck the clause down as an invalid succession pact.
A properly drafted buy-and-sell agreement avoids this entirely. The leading South African analysis explains why: the agreement is in substance a reciprocal option or conditional sale in which enforceable rights and obligations vest on signature, with only performance suspended until the trigger event. What each party acquires immediately is the right to claim performance from the others; the purchasers are identified (the surviving co-owners) and the price is fixed or determinable. Because the rights vest during everyone’s lifetime, the agreement operates inter vivos and is not a succession pact. The obligations survive death and bind the estate: an executor can and must perform a valid pre-death sale agreement.
Three non-negotiable drafting rules
A genuine sale at a real price
There must be an actual sale at a real, determinable price — never a bare "survivor takes all" clause.
Identified buyers
The buyers must be named or objectively identifiable — in a professional practice, the surviving co-owners who are qualified to hold the interest.
Reciprocal and binding from signature
The obligations must run both ways and vest when the agreement is signed, not when the trigger event occurs.
What Exactly Is Being Bought?
What the survivors buy — and what the policies must therefore cover — depends on the legal form of the practice.
Incorporated practice (personal liability company, “Inc”)
The standard vehicle for professional firms: a private company designated as a personal liability company under section 8(2)(c) of the Companies Act 71 of 2008. The subject of the sale is the deceased’s shares plus any credit loan account.
Two features matter. The professional rules restrict who may hold the shares at all. And section 19(3) makes the directors and past directors of a personal liability company jointly and severally liable, together with the company, for any debts and liabilities contracted during their respective periods of office — a liability that outlives the director. A deceased director’s estate can still be pursued for practice debts contracted while they served, so a well-drafted agreement also deals with indemnities from the continuing directors, release of personal suretyships, and settlement of loan accounts.
Private company (Pty) Ltd
Same mechanics — shares plus loan account — without the personal-liability overlay. Shares devolve through the estate to heirs unless a contract intervenes. A buy-and-sell, plus aligned pre-emption provisions in the memorandum of incorporation (MOI) and shareholders agreement, is what prevents heirs or outsiders from becoming shareholders.
Close corporation (CC)
Many older practices (and practice property vehicles) are still CCs. The subject of the sale is the deceased’s member’s interest plus loan account. Section 35 of the Close Corporations Act supplies a harsh default: the executor may transfer the interest to an heir only with the consent of the remaining members; if consent is refused or not given within 28 days, the executor must sell it. In Livanos NO and Others v Oates and Others (16115/11) [2012] ZAGPJHC 30; 2013 (5) SA 165 (GSJ) the court confirmed that where there is no association agreement restraining them, the executor may end up selling to an outside third party, with the remaining members holding only a 28-day right to match the price. A buy-and-sell agreement, mirrored in the association agreement, replaces that scramble with a pre-agreed funded sale.
Partnership
The common-law rule is that death dissolves the partnership. What the estate holds is the deceased’s share of the partnership’s net assets on dissolution; what the buy-and-sell does is oblige the surviving partners to buy that interest and continue the practice between themselves, rather than force a winding-up. Partner capital accounts play the role loan accounts play in a company.
The Loan Account Is Part of the Deal
In almost every established practice, owners have credit loan accounts — often worth millions — alongside their equity. On death the executor must call up the loan account, which can strain the practice as badly as the share purchase itself.
The estate duty exemption expressly extends to policies funding the purchase of the deceased’s shares and claims against the company — but on SARS’s stated view, a policy aimed at acquiring the loan account without the shares does not qualify. The agreement should therefore deal with both together, and the cover should be sized to both.
A practice “worth R15 million” with R3 million of shareholder loans is a R12 million share purchase plus a R3 million loan-account settlement. Insure R15 million, not R12 million.
Why Professional Practices Cannot Avoid It
For most businesses a buy-and-sell agreement is wise. For regulated professional practices it is close to structurally unavoidable, because the rules of each profession restrict who may own the practice at all. Those same rules shape the agreement: they define the eligible buyers, they sometimes set the clock, and they add compliance steps to the transfer.
Attorneys
Section 34(7) of the Legal Practice Act 28 of 2014 requires a firm’s ownership to be “comprised exclusively of attorneys”. No statutory grace period was re-enacted.
Health practitioners
Practitioners registered under the Health Professions Act 56 of 1974 may practise together only with other registered practitioners. Unregistered heirs cannot hold an interest or share in the profits.
Registered auditors
Section 38 of the Auditing Profession Act 26 of 2005 gives the estate six months to hold the shares — without votes, remuneration or profits — then the sale must happen.
Each profession’s rules, the statutory timetables, and the practical plumbing (Fidelity Fund certificates, practice numbers, locum limits) are set out in full on the profession rules page.
When Insurance Is Not the Answer
Insurance is the cheapest reliable funding for an unpredictable, potentially immediate obligation — but not every owner is insurable at sensible rates, and late-career partners may face heavy premiums. The alternatives all trade certainty for cost.
Instalment sale
Paid out of future practice income — the estate becomes the practice’s creditor for years.
Bank finance
Credit risk at the worst possible moment — and in a personal liability company, more jointly-held debt.
Sinking fund
Built from retained profits — slow to accumulate, and the need can arise on day one.
A common hybrid insures the insurable lives fully and pairs an instalment obligation with a sinking-fund commitment for the rest. What no alternative replaces is the agreement itself — the binding sale at a fair price. Fund it as well as circumstances allow.
Sources & Authority
Legislation
- Estate Duty Act 45 of 1955 — s 3(3)(a) and provisos; s 4A; s 5(1)(f)bis; ss 11(b)(i) and 13
- Income Tax Act 58 of 1962 — Eighth Schedule paras 38, 55 and 57; ss 9HA, 25, 10(1)(gI), 11(w), 58
- Securities Transfer Tax Act 25 of 2007 — ss 1, 2 and 6
- Companies Act 71 of 2008 — ss 8(2)(c), 19(3), 46, 48 and 51
- Close Corporations Act 69 of 1984 — s 35
- Matrimonial Property Act 88 of 1984 — s 15(2)(c)
- Legal Practice Act 28 of 2014 — s 34(5) and (7); s 90
- Health Professions Act 56 of 1974 — s 54A, read with the Ethical Rules
- Auditing Profession Act 26 of 2005 — s 38
Cases
- McAlpine v McAlpine NO [1996] ZASCA 127; 1997 (1) SA 736 (SCA) — a survivorship clause without a price is an invalid pactum successorium
- Davidson v Cough N.O. [2022] ZAGPJHC 1007 — the eighteen-year deadlock that follows when a deceased co-owner’s interest is never dealt with
- Livanos NO v Oates [2012] ZAGPJHC 30; 2013 (5) SA 165 (GSJ) — without an association agreement, the executor of a deceased CC member may sell to an outsider
SARS guidance
- SARS, Estate Duty Implications on Buy and Sell Agreements (External Guide GEN-ED-01-G01)
- SARS, Estate Duty Implications on Key Man Policies (External Guide GEN-ED-01-G02)
- SARS, Comprehensive Guide to Capital Gains Tax (Issue 9), ch 12.4.3
Talk to MJ Kotze Inc About Your Practice
Whether you are putting a buy-and-sell agreement in place for the first time or testing an arrangement signed years ago, the structure turns on facts specific to your practice — entity form, ownership history, policy ownership, premium flows and profession.
Practice Succession Knowledge Hub
The complete guide to buy-and-sell agreements for South African professional practices, split into the parts you are most likely to need.
Funding Structure & the Premium Traps
Cross-holding, the structures to avoid, and the three premium mistakes that destroy the estate duty exemption.
The Tax Treatment
Estate duty, capital gains tax, income tax, STT and donations tax — with a worked example and the 2026/27 figures.
Profession Rules: Who May Buy
Attorneys under the LPA, health practitioners under the HPCSA rules, and the auditors’ six-month statutory clock.
The Agreement & What Goes Wrong
The clause-by-clause checklist, disability and lifetime buy-outs, the twelve failure modes, and the roadmap.
Frequently Asked Questions
The questions practice owners actually ask — premiums, family trusts, loan accounts, new and departing partners.
Why you can trust this: Martin Kotze has been an admitted Attorney of the High Court of South Africa, registered Conveyancer, and Notary Public since 2014, practising from Pretoria. The firm is regulated by the Legal Practice Council under firm registration 17444.
This guide is general information, not legal advice for your specific matter.