Business Succession planning is critical for business with multiple owners.
It can allow for the continuing owner(s) to purchase the former owner’s interest at an agreed valuation. Or outline the process for its sale, or introducing a new equity partner.
We outline a few considerations here.
Leaving the Business – If an owner leaves (whether by death, trauma, permanent disability, retirement, expulsion or other reasons stipulated in the Agreement), the departing owner agrees to give a call option in favour of the continuing owner. This essentially means the continuing owner can call for the sale of the existing owner’s share in the business. At the same time, each owner grants an existing owner a put option by which the continuing owner(s) can be required to buy the existing owner’s share of the business for an agreed sum.
Insurance – A Buy Sell Agreement should include the requirement to take out and maintain insurance to fund the purchase of a deceased owner’s share. The agreement should also stipulate how the insurance premiums are to be paid.
Valuation – It is vital to set out how an existing owner’s share is to be valued. This will avoid uncertainty at the time of the sale.
Indemnity – The departing owner may be indemnified from the remaining owners(s). It will place a value on the business or a method to determine the value of the business at time of death. This lets all the partners agree a valuation, so the remaining business partners can buy out the remaining share at a price that is fair to everyone.
Payment – By purchasing life insurance on the lives of the business partners for the value of their share, the heirs of the deceased owner can be assured of timely payment for their share of the business.
Protect Assets – Life insurance gives you the peace of mind to know that buying out the other share of the business won’t put a strain on your business’ cash flow, or force you to sell off assets.
Fairness – The beneficiaries of the deceased owner receive a fair price for the business as the price is decided in advance, and they know the deceased business partner had the opportunity to agree to the value of the business while they were alive.
Realisation – A proper agreement facilitates the settling of the deceased owner’s estate. Without it, many estates can be held up for months or years while the value of the business is determined.
p: (03) 9620 2001