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buy-sell agreement

Business Risk

Buy-Sell

Business owners are subject to some unique risks when it comes to how their beneficiaries can benefit or monetise the equity stake in their businesses.

For example, have you considered the following?

  1. As a partner in a medical, legal, architectural or engineering firm, what problems would your beneficiaries face in inheriting your equity share?
  2. How would the rest of your business partners feel about your spouse or children (as beneficiaries) becoming their business partner(s) if you suddenly pass away?
  3. Are your spouse or children (as beneficiaries) interested or capable in taking over your interests and business clients when you go?
  4. Is there a way for your spouse or children (as beneficiaries) to receive cash instead of inherit the equity share of your business and its associated liabilities?

If you are like most business owners, you might be too busy managing your business to think too much about a succession plan and the chain of events that will unfold if you were to suddenly pass away. What is most likely to happen then is that your beneficiaries would inherit your share of the business – i.e. they would become the partners or shareholders in the business that was previously yours.

But will they be able to contribute, or even understand what is happening?

They may become minority shareholders in a business they don't understand, and could potentially be taken advantage of by other shareholders, directors or anyone else who may not have their interests at heart.

On the other side, how would your business partners feel when someone they don't know intimately (your beneficiaries) suddenly becomes a shareholder in the business, solely by virtue of inheriting it? What happens if they lack sufficient funds to buy over the shares from your beneficiaries, or buy it at a very low and unfair valuation?

This is where some forward planning would help immensely and protect both the interests of both your beneficiaries as well as that of your partners.

One commonly-employed solution is to utilise a 'Buy-Sell' Agreement.

A Buy-Sell Agreement (or business continuation agreement) is a customised protection solution which provides for the future sale of your business interests in the event of an unforeseen and unfortunate event, e.g. your death or mental incapacity. A formula for valuing the business – and hence the dollar-value of your share – is normally agreed upon upfront (when you are still alive) and incorporated into the agreement. The agreement is activated upon the death of a partner/shareholder and dictates how the deceased's shares should be valued and sold to the other partners/shareholders.

The second and very important part of the Buy-Sell Agreement is funding the purchase of the shares. This is particularly important as the existing shareholders may not have sufficient funds to be able to buy over the shares at the agreed price set by the formula. This is fairly easily solved through the use of insurance and a cross-ownership structure.

Speak to us to help you figure out how best to structure the plan to meet your needs.

Business Risk

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