Plan for the unexpected - how a Shareholder Buy / Sell agreement safeguards your companies future.
If you own and operate a business with others, have you considered what might happen if one of your partners:-
A Shareholder Buy Sell Agreement allows you to stipulate what would happen upon certain trigger events, allowing you to plan for the unexpected and safeguarding your companies future.
- is unable to work for a long period of time;
- suffers from a permanent disability rendering him or her unable to work in the future; or
Generally, if a shareholder or partner dies, their share in the company or partnership will form part of the estate and be distributed to the beneficiary they have nominated under their Will.
The beneficiary may not be a person who has the necessary skills and resources with whom you would feel comfortable being part of the business.
These events may severely disrupt the smooth running and operation of the company. Ultimately, the deceased’s share of the business is now out of the control of the surviving owners.
All parties involved may prefer a simple cash payment for the deceased parties share in the company or business, to go to the surviving owners.
Likewise, if a director is suddenly unable to work due to illness or disability, it makes sense that his or her share of the business is distributed to the remaining owners so that they can continue to operate the business smoothly in his or her absence.
These events don’t have to be a major source of stress and upheaval.
The crucial point is that business owners are able to plan ahead to fund contingencies such as these - so that if they do occur, the situation may be handled with a minimum of fuss.
An estate plan for your company
Used in conjunction with an insurance policy, the Shareholders Buy/Sell Agreement is like an estate plan for a company.
If a shareholder or other key person dies, the insurance policy kicks in to provide money to enable the other shareholders to buy out the deceased’s owners’ share in the business.
Likewise provision is made in the event that an integral person is totally or permanently disabled.
It’s like having a Will for your company
A Shareholder Buy/Sell Agreement can be used as a part of a corporate succession plan for your company.
It enables all interested parties to have a say in the control and operation of the business, should unexpected events occur. These events are referred to as “trigger events” in the Agreement and you can define what constitutes a trigger event.
Why should I put a buy/sell agreement in place?
- by planning ahead, you can fund a buyout that you may not otherwise have been able to afford upfront;
- gives all parties the chance to organise and agree upon issues before such a stressful event occurs;
- if a trigger event did occur, the stress and upheaval on the business and remaining owners is minimised;
- keeps the business out of the hands of third parties such as estate beneficiaries;
- offers greater control and input on what is to happen should certain trigger events occur.
What issues to consider
When implementing a buy/sell agreement, some issues to consider are:-
- which parties will take out the insurance?
- the events that will be identified as “trigger events”;
- how the buyout price will be determined;
- any tax implications;
- increasing the insurance amount to cover any taxation costs, such as capital gains tax.
It is important to review your Buy/Sell Agreement at least once a year to ensure that the arrangements you have put in place, including the buy-out value, remain applicable.
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By Ian MacLeod