In the Cove has a broad and interesting demographic. We know many Lane Cove business owners and Lane Cove residents, who have businesses located outside Lane Cove or online, read In the Cove articles. SRM Lawyers are ITC Gold Sponsors. We publish monthly articles, written by Renee Stevens, on interesting legal topics that may impact Lane Cove residents generally or business owners.
This month Renee is looking at Business Succession Planning and the importance of a Buy-Sell Agreement.
Background
It is common for individuals to make a will which deals with their personal assets upon their death, but it is not commonly known that business owners should put measures in place to determine how the interests in their business will be dealt with upon their death, where there are two or more directors or partners.
Consider this example. Julie and Ben are good friends and have been running a successful catering business for several years. They are both directors and equal shareholders of the company that operates the business. The business is their pride and joy. Julie unexpectedly dies. The executor of her estate is her brother, Peter. In his capacity as executor, Peter calls a director/shareholder’s meeting for the purpose of either selling the business on the open market or for one of the beneficiaries (who have no experience in catering) to be nominated as a replacement director in Julie’s place. Ben is devastated because he doesn’t have the capacity to run the business without an experienced partner and doesn’t have the money to purchase Julie’s 50% share in the business.
Had Julie and Ben entered into a buy-sell agreement, Ben could have controlled what would happen to the business as a result of Julie’s death.
What is a buy-sell agreement?
A buy-sell agreement is an agreement entered into between business partners to allow for the buyout of the other partner’s interest in the business should a specific trigger event occur, such as death, trauma, long-term disability, retirement or bankruptcy. It can be likened to a will for your business.
A buy-sell agreement can be used by partners in a partnership or directors of a company. The agreement can be a stand-alone document or incorporated into a partnership/shareholders’ agreement. Essentially, such an agreement will enable:
- an outgoing proprietor the option to sell his or her interest in the business to a continuing proprietor; and
- an option for a continuing proprietor to purchase the outgoing proprietor’s interest in the business upon the occurrence of specified trigger events.
Upon a business owner’s death, their share in the business may be transferred either by gifting the shares in the business under a will or selling the shares via a buy-sell agreement. The buy-sell agreement will take precedence over the will – the business will be transferred pursuant to the agreement previously made by the business owners.
The buy-sell agreement should make provision for how the business’ value will be calculated, the time frame for exercising the option and how the interest will be transferred.
Key benefits of a buy-sell agreement
A buy-sell agreement is a vital part of a business’ succession planning processes and will provide a range of benefits which include:
- reducing the risk of ownership disputes upon a trigger event;
- minimising the uncertainty for the business operation;
- offering the outgoing partner/director (or his or her estate) financial compensation for the disposal of his or her interest in the business;
- giving the continuing owner/s the first option to purchase the outgoing owner’s interest in the business upon a trigger event; and
- providing the continuing owner/s with peace of mind and the ability to focus on running the business, rather than worrying about how they will buy the outgoing owner’s share or prevent a third party from doing so.
How are buy-sell obligations funded?
It would be rare for a business owner to be able to quickly come up with the funds required to purchase their partner’s interest in the business.
As such, buy-sell agreements are often linked to an insurance policy to provide necessary funding to be able to buy out the deceased, disabled or departing partner’s interest. Depending on the parties’ circumstances, the policies can be held under different arrangements which include:
- cross ownership – the owners of the business hold policies over each other
- principal ownership – the owner holds the policy on himself/herself
- company ownership – the business holds the policies on behalf of all of the owners
The negotiation and preparation of a buy-sell agreement (together with other business succession documents) requires legal and financial advice specific to each business owner’s circumstances. Please contact SRM Lawyers if you’d like to find out more.
Contact Details
SRM Lawyers
Address: Level 1, 102-104 Longueville Road
Website: SRM Lawyers
Phone: 02 9188 9631
Michael Stevens
Lawyer
Mobile – 0419 257 392
Email – [email protected]
Renee Stevens
Lawyer
Mobile – 0410 466 286
Email – [email protected]
Linked In: SRM Lawyers
This is advice of a general nature, this article does not constitute legal advice and is not meant to be complete or exhaustive.
This is a sponsored post. SRM Lawyers are ITC Gold Sponsors. Thank you to all our ITC Gold Sponsors who support ITC. This support enables us to to fund our website and our community work. #itcgoldsponsors.
