What would you do if the worst happened to your business partner? After you have consoled their partner, overcome the shock and had a good cry your thoughts will turn to your business investment. You have both invested a lot of time and money into your business; if your business partner is no longer there who gets their share of the business?
Once any business has more than one owner, we recommend entering into a Buy Sell Agreement. This is an agreement that states if a part-owner of a business wishes (or is forced) to sell, he or she must sell to the other part-owners or another person named in the agreement. The determination of the price of their share of the business is also named in the agreement.
This agreement is made between the business owners to determine the process for selling their investment in the business. It sets terms for the exit of a business owner if they decide it is time to leave and also the terms if they are forced to leave in the event of death or disability. Usually the owners will agree that the other owners have the first right to purchase the exiting party’s share of the business and if for any reason they are unable to do this, the remaining owner will have to approve the sale to a new owner. It will also determine if an owner must be active in the business or if they can be an investor only.
In the event of a forced sale (if one owner dies or becomes disabled) could you afford to purchase their investment? Buy Sell Insurance is a type of income policy that funds a buy sell agreement to buy the interests of a disabled shareholder. Usually the agreement will be structured such that the business pays the premiums for the insurance policy, then, if your business partner suffers an insurable event, you get their shares in the business and the insurance funds are paid out to them or their family.
Typically a Buy Sell Agreement governs the following key areas (not exhaustive):
- How equity will be transferred and who may or may not invest in the business.
- Transfer of equity upon the disablement of a shareholder. Insurable events may include:
- Total and Permanent Disability (TPD)
- How the insurance proceeds for the above insurable events are paid and settled.
- Provides a link to the shareholders agreement in relation to the valuation of equity.
Like all insurance, you hope you will never need to use it, but being prepared for the worst means that if the worst occurs your focus can remain on the management and running of your business, not how you will afford to keep your hard earned investment out of the hands of strangers.