Business Planning: Buy – Sell Agreements

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Do you really want your business partner’s spouse as your next business partner?

Heres the problem: you have built up a business with a partner and worked well together successfully. However, you know that if your partner died, you would really not want to be running the business with their spouse. Most likely your business partner’s interest in the business is left to their beneficiaries who don’t have the skills, experience or expertise to contribute and/or may just not be compatible with your personality.

What should I do?

You may wish to purchase the outgoing partner’s shares in the business, but don’t have either the funds or anything in writing giving you the right to purchase at an agreed price.

Sit with your partners and adviser, and ask some simple questions:

  1. If one of the business partners died or became totally disabled, would you want to buy their share of the business?
  2. Can you agree on a way of valuing the business?
  3. Should you have a business succession plan that gives each partner rights to buy the other’s shares in the event of them leaving, dying or being disabled?
  4. How would you fund this type of arrangement, and would you have a facility or strategy arranged to fund it?

The best strategy is to formulate a “Buy/Sell Agreement” as part of your Business Plan and to have the risk of death or disability funded through insurance. The insurance would provide funds in these events to ensure the remaining partners could retain control of the business, and the family of the exiting partner would be taken care of financially.

Case Study

Jeff and Mark are co-owners of a business, J & M Pty Ltd. J &M manufactures specialised metal components for use in oil and gas well drilling projects.

Neither Jeff nor Mark’s wife is employed by the business or takes any active role in it. Jeff and Mark both have wills.  Each will gives all their assets to their wives.

Scenario 1

Jeff went on a skiing trip to Perisher where he was fatally injured in an accident. His widow now is a 50 percent owner of the business. She needs money and wants to liquidate her husband’s shares in J & M Pty Ltd, but Mark has told her that is impossible because he cannot personally afford to buy her out.

Jeff’s widow does not receive his salary, and has no idea as to what is going on in the business. She feels isolated and neglected, and is worried that Mark will not pay her anything. She is off to see a lawyer.

Scenario 2

Jeff and Mark had taken the time to consider what would happen if one of them died, became incapacitated, ill, bankrupt, or simply wished to retire. Their advisors had arranged a buy-sell arrangement between them, so there are a specified series of steps to take to value the business and buy out Jeff’s widow’s interest.

To fund the purchase price on Mark’s behalf, they had arranged Life and TPD & Trauma insurance on each life, with the proceeds to go to the family of the exiting partner as payment for the shares in the business.

This scenario outlines several issues that commonly plague business owners, but for which there are solutions. Please contact your advisers to work on a solution for your needs.

 

  • Liam

    A few more Tips:

    Beware of Total & Permanent Disability (TPD) claim payments being taxable. TPD payments are only exempt from tax if paid to the injured/ill party. Therefore avoid cross ownership structures.

    The transfer of the business on death or disability may be taxable. Ensure that your tax adviser calculates this exposure and you consider whether or not the amount insured should be grossed up for this tax.

    @smsfcoach

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