Buy/sell agreements and importance to a business
A buy/sell agreement provides business continuation with a minimum of disruption by creating ready buyers and sellers at a fair and negotiated price upon the sudden death or illness of a partner.
Most business owners think it will never happen to them so little or no thought is given to how the business is to be transferred on to the surviving business owner/s should a tragic life altering event, such as death, disability or major illness occurs to their business partner or spouse.
Even less thought is given to a similar event happening to a Key person of the firm who may be a manager responsible for the production of business income, resulting in a critical cash flow or profit reduction.
A buy/sell agreement
- Provides business with a better chance of survival.
- Ensures the departing owner (or their estate) receives true value after tax.
- Allows for an orderly transition rather than forcing a fire sale of the business assets.
- Ensures key employees can be retained and help survival of the business.
- Reduces or eliminates Capital Gains Tax, income tax and stamp duty.
If there is no buy/sell agreement in place
- Third parties you may not like or even know could end up with an unacceptable degree of control in the business.
- A deceased owner’s estate could demand that the business be wound up and proceeds of asset sales be distributed. If you wanted to retain the business you would need to find funds to re-equip the business.
- It could be necessary to negotiate additional borrowings to retain the business or restart the business.
- The stability of the business could be questioned by suppliers and customers who may wish to renegotiate more severe credit terms, performance penalties etc.
- Banks may insist on immediate repayment of debt if they feel the business may be at risk or they may insist you provide a greater level of security.
Funding
Buy/sell agreements can be funded by relatively small annual payment for insurance which will ensure the business has the cash available to repay a loan on the death or disablement of a partner, or purchase the remaining share of the business if a business partner were to die.
Buy/sell agreements can provide the following:
- debt payout by having a lump sum paid out to the business upon death or disability
- a regular income can be paid out to ill partner so the business can use the freed-up funds to pay for additional skilled staff or specialist advice
- a lump sum can be paid out to ensure the deceased’s share in the business can be paid out to the estate
- business expenses insurance can be paid out should the business suffer from a change in trading conditions due to conditions out of their control. Will also cover loss of earnings should a partner or even a sole trader being unable to work due to illness.
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