Are you a small Business Owner?
Have you taken the time to think what will happen with your business interest in the event of your death or disability?
Do you have a plan in place to transfer your share of the business to your partners, or will your spouse inherit your share? Will your spouse get along with your partners? Will your spouse be able to sell the share at a fair price? Will your partners have the means to buy your share? Will your spouse have to work in order to receive any value out of the business? Is it possible that an outside party will become a partner?
If you are concerned about these questions, you need a buy and sell agreement.
What is a buy and sell agreement?
You and your business partners agree that in the event of any of you dying or becoming permanently disabled, the other partner(s) will buy (and the deceased ‘s estate or disabled partner will sell) the deceased or disabled partner’s share in the business at a predetermined price .
The transaction can be funded by
• Cash in hand
• A bank loan by the remaining partners or
• Each partner taking out life and disability cover on the partners’ lives.
Life assurance is generally the most cost-effective and practical way to fund a buy and sell agreement. And it provides the ideal solution. How?
• It provides your family with immediate capital in the event of your death or disability
• It ensures the continuity of the business in the event of any of your partner’s death or disability.
Reasons why you need a buy and sell agreement
Without an agreement in place, there are potential negative implications for you, your spouse and children as well as for the business and the remaining partners.
Implications for you, your spouse and children:
• You/your spouse could remain a passive partner and share the profits – this may lead to the remaining partners wanting to reinvest profit for growth or increase their salaries to minimize profit.
• You/ your spouse could sell the business interests to the remaining partners – this may lead to the remaining parties not having the necessary funds/ they may underpay.
• You/your spouse could sell the business interest to an outside party – this may lead to a below market-related price as it’s a forced sale
• Your spouse could become involved in the management of the business – your spouse and the remaining partners may not get along / your spouse may not have the right skills set.
• Your spouse and partners may not agree on a fair price – this could delay the winding up of your estate.
Implications for the business
• Your partner/ spouse may want to sell their business interest – you may not have enough funds or have to incur significant debt.
• Your partner/ souse may demand an unrealistic price – negotiations may become deadlocked and business continuity may be affected.
• Your partner/spouse may sell his/her business interest to an outside party – you may not get along or may not trust the outside party.
We will discuss the valuation of your business together with a couple of examples as to how to structure a buy and sell agreement to follow in next article