The Agreement — and What Goes Wrong
A buy-and-sell agreement is short compared with a shareholders agreement, but every clause is load-bearing
Written by
Martin Kotze
Attorney, Conveyancer & Notary Public
Last reviewed:
Contents
What Belongs in the Agreement
This is the working checklist, with the reasons. Note in particular that section 15(2)(c) of the Matrimonial Property Act 88 of 1984 requires a spouse’s written consent for the alienation of shares and similar assets of a joint estate — a routine omission that makes enforceability arguable years later.
Eight load-bearing clauses
Parties and the interest
Every co-owner, the practice entity, and the exact interest each holds — shares and class, member’s interest percentage, or partnership share — plus each owner’s loan or capital account. Record each party’s marital status; where a party is married in community of property, obtain the spouse’s written consent, and refresh consents when parties or regimes change.
Trigger events, precisely defined
Death always; permanent disability and usually severe illness; sometimes retirement or sequestration. The disability and illness definitions must match the policy wording verbatim, and the agreement should say how the event is proved and whether a disabled owner may elect to stay.
A true, binding sale
On the trigger, the survivors must buy and the estate must sell — a firm bilateral obligation, or reciprocal put-and-call options, with the price and the buyers certain or objectively determinable. This is both the commercial point and the legal-validity point: a bare survivorship clause is void, and a one-sided option invites the very brinkmanship the agreement exists to prevent. Apportion the purchase among survivors — usually pro rata to existing holdings — and say so.
Price and valuation
A stated value reviewed at least annually, a formula (earnings multiple, net asset value), or independent determination — and a fallback if the review was skipped. Deal with the loan account at face value alongside the equity. Remember that SARS is not bound by the agreement’s price when valuing the estate, and that between connected persons a price far from market value invites donations tax and paragraph 38 adjustments.
The policy schedule and premium protocol
List every policy: owner, life assured, insurer, number, sum assured, benefits. Oblige each owner to keep their policies in force, pay premiums punctually from their own resources, and not to cede, pledge, surrender or allow lapse; require annual proof of payment. If the practice administers payment, specify that each premium is debited monthly to the policy owner’s loan account — and never to the life assured’s.
Proceeds, shortfall and surplus
Proceeds are applied to the price. If the policies underpay, say how the balance is funded — instalments over a defined period, with interest at a stated rate, and security if appropriate. If they overpay, say who keeps the surplus (usually the policy owner). Provide for an uninsurable or under-insured owner and for a repudiated claim, so a policy failure does not collapse the sale.
People coming and going
New co-owners accede to the agreement, take out policies on the existing owners, and are insured by them in turn. A departing owner’s policies are dealt with expressly — typically the retiring owner takes over the policy on their own life at its value, and cedes the policies they hold on the others to the incoming owner or the survivors. Provide for simultaneous or closely successive deaths.
Alignment with everything else
The MOI and shareholders (or partnership/association) agreement must permit the compulsory transfer — amend pre-emption clauses or carve the buy-and-sell out of them, and record a waiver of pre-emptive rights for trigger-event transfers. Wills must not bequeath the practice interest inconsistently; the clean pattern is for the will to deal with the proceeds of the sale. Include dispute resolution and a standing annual review clause.
Disability and Severe Illness: The Lifetime Buy-Out
Death is the headline event, but a permanent disability or serious illness that ends a partner’s practice is at least as disruptive — and more common during working life. A complete buy-and-sell arrangement covers it: lump-sum disability (and often severe illness) benefits on each policy, matching trigger definitions in the agreement, and a funded compulsory sale just as on death. The tax picture differs from the death case in ways worth understanding before the event, not after.
The proceeds remain tax-free to the buyers
Section 10(1)(gI) of the Income Tax Act 58 of 1962 expressly covers disablement and illness benefits, and paragraph 55(1)(c) extends the CGT disregard to policies insuring against “death, disability or illness” for buy-out purposes. Estate duty is simply irrelevant — there is no estate.
The seller’s CGT is heavier
A living seller makes an actual disposal: proceeds minus historic base cost, with no section 9HA market-value uplift and only the ordinary R50,000 annual exclusion (the R440,000 exclusion applies only in the year of death). Paragraph 57 small-business relief can help — compulsory disposal on ill-health is one of its qualifying triggers — but the disabled partner should expect a real CGT bill on a successful practice, and the financial plan around the buy-out should provide for it.
Pricing and definitions matter even more
The disability sale is a lifetime transaction between connected persons: a stale undervalued price triggers paragraph 38 market-value substitution and deemed-donation exposure; an inflated one reverses the problem.
And the definitions must line up. If the policy pays on “own occupation” permanent disability but the agreement’s trigger is undefined or different, the practice can end up with an unfunded obligation or a funded non-obligation — both litigation material. Align the agreement’s disability definition word-for-word with the policy wording, decide deliberately whether a partner who is disabled for practice but wants to remain an owner may do so, and say so in the agreement.
The Twelve Failure Modes
Advisers and SARS’s own guide keep meeting the same errors. Test any existing arrangement against this list.
The agreement was never signed
Policies exist, obligations don’t — and the policy owner may lawfully keep the money without buying anything.
Ownership mismatch
The deceased owned the policy on their own life; or the company owns the policies; or the policies and the agreement describe different owners. The exemptions turn on ownership.
Premiums borne by the wrong person
The practice paid and debited the life assured’s own loan account, or allocations were never checked. One bookkeeping habit can cost 20–25% of the proceeds.
A ceded personal policy in the structure
The deceased once paid premiums on it. The estate duty exemption is irrecoverably lost even though the CGT position may survive.
Shares migrated into family trusts after signature
Neither “co-owner” holds shares any more, so the exemption fails.
Stale values and lagging cover
The practice grew, the cover didn’t. The family is underpaid or the survivors underfunded — and a large mismatch invites SARS’s excess-proceeds discretion and donations tax arguments.
The loan account was forgotten
The shares are bought, then the executor calls up a seven-figure loan account the survivors never insured.
Trigger and policy definitions differ
A policy that pays on a disability the agreement doesn’t recognise, or vice versa.
The MOI’s pre-emption clause contradicts the buy-and-sell
And, being the constitutional document, it wins.
The will contradicts the agreement
The same shares bequeathed to a spouse and to the buyers collapses the sale mechanics and muddies the exemption.
A missing spousal consent
A party married in community of property signed alone. Enforceability against the joint estate is now arguable.
New partners never added, departing partners never removed
The policy matrix and the agreement describe a practice that no longer exists. The exemption tests co-ownership at the date of death: cover on someone who has already exited is outside it.
The final failure mode is having nothing at all — which, as Davidson v Cough N.O. [2022] ZAGPJHC 1007 shows, can cost a family and a practice eighteen years.
Putting It in Place: A Roadmap
Value the practice
Agree a defensible market valuation and method — earnings, net assets, or independent — separating equity value from loan accounts and, in professional practices, transferable goodwill from personal goodwill.
Confirm the ownership rules of your profession
Who may lawfully buy? Any statutory timetable? Any regulator steps on transfer — practice numbers, Fidelity Fund certificates, licences?
Have the agreement drafted alongside the corporate documents
The buy-and-sell, the MOI and shareholders agreement amendments, the spousal consents and the will updates are one drafting exercise, not four.
Take out fresh risk policies matching the structure
Each owner owns and pays for the policies on the others’ lives; sums assured match each owner’s equity plus loan account; disability and severe illness benefits match the agreement’s triggers. Expect financial underwriting — insurers will want the valuation.
Document the purpose
The agreement recites that the policies are held to fund the acquisition of each owner’s interest and claims; the policy schedule ties each policy to the agreement.
Set the premium mechanics and prove them
Personal debit orders, or a practice-administered protocol debiting the correct loan accounts, with an annual reconciliation someone actually performs.
Register the moving parts
Diarise the annual review: valuation refreshed, cover adjusted, premiums verified, parties current, consents current, wills consistent.
Rehearse the claim
Everyone should know where the agreement and policies are, who notifies the insurer, and what the executor will be asked to sign. The arrangement is judged entirely by how it performs in its worst week.
Draft It Once, Properly
The buy-and-sell, the MOI and shareholders agreement amendments, the spousal consents and the will updates are one drafting exercise, not four. MJ Kotze Inc handles them together.
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.
Buy-and-Sell Agreements for Professional Practices
The pillar guide — what happens without one, the two legs, validity, and what is actually being bought.
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.
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.