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BUY-SELL AGREEMENTS An established Buy Sell Agreement is essential ...
BUY-SELL AGREEMENTS An established Buy Sell Agreement is essential whenever two or more people own a business to ensure seamless and impartial transfer of equity in the event that one partner must abandon the business involuntarily. Funding to execute such an agreement must be carefully considered. In the event of an unfortunate event, it is desirable that all parties recover in the best possible way. Thus appropriate, linked insurance cover is usually needed to ensure such an outcome. Regardless of whether proprietors have appropriate insurance cover, ownership of the business and transfer of equity can be ambiguous and pose enormous difficulties if the business lacks a properly worded supporting Buy Sell Agreement in place. Unfortunately many businesses these days don’t. Nevertheless establishing appropriate documentation is not an expensive or unachievable venture. • Ongoing proprietors must negotiate with the spouse and/or beneficiaries. Many difficulties may arise; funds may not be obtainable, the value of the share may be under contention and the beneficiaries may be forced to receive only that which is on offer without any chance of negotiation. Arguments may arise between the surviving proprietors concerning a number of aspects, for example whether the value of the business has diminished as a consequence of the loss of the previous partner’s contributions. • The possibility of beneficiaries opting to take an active role in the business may arise regardless of whether they are capable, or of the wants of the surviving proprietors. This possibility could present devastating consequences for the business itself and lead to costly and time consuming distractions. A Buy Sell Agreement, otherwise known as a “Business Will” is a contract between business partners that establishes the rights and obligations of each partner in the event of involuntary abandonment of the business by a partner. It specifies: • “Trigger events”: in the event of situations that trigger a partner’s unexpected departure (e.g. death, critical illness, trauma etc.) • “Call options”: refers to the right of one proprietor to acquire another’s share under specific circumstances. • “Put options”: refers to the right of one proprietor to force acquisition of another’s share under specific circumstances. • “Agreed price”: the price at which the share will be sold. Insurance policies held by the proprietor’s provide the funding. These policies are noted in the Buy Sell Agreement as necessary in order to cover the proprietor’s share of the business. For the Continuing Owners, a Buy - Sell Agreement: • Eliminates estate claims to management rights of your business. • Prevents introduction of new owners with incompatible philosophies and agendas. • Protects against control of the business being frozen through probate difficulties or legal restrictions if an owner loses legal capacity. • Provides assurance of the opportunity to buy shares from an owner should a tragic event occur. • Arranges funding for the purchase, at a predetermined price. • Assures continuity of your business with minimal disruption. • Provides security for suppliers, staff, creditors etc. For the Estate/family of the outgoing owner, a Buy - Sell Agreement: • Provides an assured purchaser for the business. • Guarantees a fair price and guaranteed funds to complete the purchase. • Reduces the delay between suffering the tragic event and receiving insurance proceeds.
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