We all enter into business with the aim of earning a good income, controlling our destiny, having a good work life balance and eventually selling our business for a large profit. But what happens should you or one of your business partners be forced into early retirement as a result of a temporary or permanent disability, trauma (such as a stroke or heart attack) or death?
This can leave the continuing partner being forced to operate the business with the retiring partners’ family members or having to purchase the retiring partner’s share in the business whilst at the same time having potentially lost a key person of that business. The result of which could be devastating.
The following questions are the most commonly asked by our clients when considering their options in business succession planning.
It is impossible to predict if and when a business partner could be struck down by death or illness that forces them to exit the business. We all believe that we are going to live forever. The only way to fully protect yourself is to put a buy/sell agreement in place which clearly establishes what will happen in the event of the forced retirement of a business partner.
A buy/sell agreement is an agreement that is entered into between the owners of a business that clearly sets out how business assets would be transferred to the continuing owner upon the retirement or forced retirement of one of the owners. In essence, it involves the parties agreeing on the value of the business (reviewed annually) and personal insurances being taken out to cover events such as temporary or permanent disability, trauma (for example stroke or heart attack) and death. The proceeds of the insurance are utilised to pay out the retiring business owner or their estate and avoids the need for the continuing business owner to find funds to purchase the others’ share. Where the retiring owner is a key person, an additional insurance amount may be taken out to assist the continuing owner to find a replacement key person.
Normally this is done by a collateral agreement called a “funding agreement”. This agreement requires an annual review of the value of the business and insurance policies to ensure that the cover is adequate.
Immediately. As mentioned above, we all expect to live forever and therefore it is easy to put off entering into a Buy/Sell Agreement until cash flow is better. Clearly this should not be the case. The sooner you put in place a Buy/Sell Agreement the sooner you have peace of mind. It is an essential part of retirement planning.