Protecting your business in the event a business owner dies is vitally important to the continuation of any company. In most cases business owners are the ones who manage, work and control the major decisions on a daily basis.
What are the risks?
In the absence of any specific arrangement, the business owners interest is likely to be:
- Distributed in accordance with their Will (e.g. to their surviving spouse or nominated person); or
- Controlled by their beneficiaries (should the interest be owned by a structure e.g. Family Trust)
If a spouse is to be the new part-owner of a business, he/she would then have the same management and financial rights as the deceased owner. In many cases, the spouse does not possess the necessary skills to assist in running the business. Furthermore, many may not even want to take on that responsibility. Consequently, it is these circumstances where we see many issues arise. For example the remaining owners cannot raise enough capital to buy out the deceased owner’s equity in the business, nor can they usually agree on the price.
“If you are in business with other people, funding a Buy Sell agreement with insurance can ensure an orderly transfer of ownership in the event that you or another owner dies or is disabled”.
(MLC Insurance)
Buy Sell agreements
One strategy available to business owners is to put in place a Buy/Sell Agreement. This agreement acts to protect the business and ensure an orderly transfer of ownership. As such, it should be considered as part of the broader succession planning process. A Buy/Sell Agreement is a legal contract between business owners that usually comprises two components:
- A ‘Transfer Agreement’ outlining what would happen to each owner’s business interest should certain type of events occur and how the interest would be valued at that time.
- A ‘Funding Agreement’ outlining how the money will be raised to finance the ownership transfer and who will receive it.
Ways this can be funded?
Especially relevant are a number of ways a Buy/Sell agreement can be funded. The most common example is for the remaining owners buy out the departing owner’s interest using their own capital or borrowed money. However; when taking into consideration death and disability, insurance is usually thought to be considered the most cost-effective and efficient way to raise sufficient capital.
Other key considerations
As this is a legal dealing and an agreement between business owners, it should be prepared by a solicitor.
Insuring your business ownership can be a difficult area of your financial circumstances. We can help consider all the facts and determine whether funding a Buy/Sell agreement with insurance suits your specific circumstances.
(P) (07) 3284 7875 | (F) (07) 3284 4790
