Buy Sell Agreements
Ask yourself this question…
“If your business partner dies, what will happen to their share of the business? Who will inherit or take over their shareholding? How would I afford to buy their share?”
In the absence of any specific arrangements the shareholding is likely to be dealt with in accordance with their Will, and most commonly it is their surviving spouse who inherits their share. As the new part-owner of the business, that spouse would be entitled to the same management and financial rights as the deceased owner.
Then ask yourself this question….
“Do I want that person in my business? Do they have the necessary skills to assist in running the business? Do they want to even be involved or would they prefer a lump sum of cash instead?”
What if your business partner becomes seriously ill or disabled? They would still be entitled to receive their share of the profits, but are you doing all the work? Is this going to place a strain on your relationship and quite possibly put the business under pressure?
To protect the business and ensure an orderly transfer of ownership, a Buy Sell Agreement should be put in place.
- What is a Buy Sell Agreement?
- What are the benefits of a Buy Sell Agreement?
- What steps are involved?
What is a Buy Sell Agreement?
A Buy Sell Agreement is a legal contract between business owners and is made up of two parts
Part 1 – Transfer Agreement
This details what will happen to each other’s business interest or shareholding in the event of certain trigger events being met, i.e., death or disablement or illness.
Part 2 – Funding Agreement
This part details how the money will be raised to finance transfer of ownership and should include any associated tax consequences
There are a number of ways to fund a Buy Sell Agreement
- The remaining business owners may use borrowed money or their own capital.
- They may choose to create a firm sinking fund and if it has enough capital, to drawn down on the fund or
- The most cost effective and efficient funding mechanism in through insurance.
What are the benefits of a Buy Sell Agreement?
- It provides stability at a time when the business could otherwise be in a turmoil and helps it to continue to be viable.
- It provides an already decided mechanism to transfer ownership from one individual or entity to another.
- It reduces the risk of ownership disputes.
- Its provides the departing owner or entity with adequate financial compensation for the disposal of their shareholding.
What steps are involved?
Step 1 – Our Business Insurance management
Our Business Insurance manager will formulate the correct strategy, prepare the advice document, and facilitate the implementation of the policies. This is a specialist area that requires skills and the right advice. We will also work with other parties, such as your solicitor.
Step 2 – Value the business
MP+ will be able to help you place a value on the business and each individual shareholding. They will be able to help determine the overall funding requirement as tax considerations should be taken into account.
Step 3 – Engage your solicitor
We strongly recommend that you use a solicitor who has experience in this area as they will be instrumental in the architecture of the agreement, and will need an appreciation for the issues that are likely to arise.
We can assist you in this process if you do not have a solicitor.
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