Buy an Sell Agreement: Who will be your next business partner?

Take charge and don't let it catch you off guard.

When a co-owner of a firm dies, the estate of the deceased co-owner can be badly harmed, but the surviving owners may also suffer challenges.

The possible difficulties generated for the estate of the deceased owner:

• The remaining owners may not have the resources to purchase the shares from the estate;
• The spouse may not want to participate in the business, leaving him/her at the mercy of the existing owners;
• The deceased owner may have had unique skills that he/she brought to the business, meaning that the risk in the business increases if those skills are no longer available to the business;
• If the deceased owner received a salary in the business, the spouse cannot simply claim that pay after he or she dies unless he or she works in the firm on the same basis as the deceased owner.

The possible difficulties for the remaining owners:

• The executor of the deceased owner's estate may interfere in a business about which he or she knows nothing;
• He or she may wish to sell the owner's interest to the highest bidder, exposing the business to unknown external investors; and
• The existing owners may lack the funds to repurchase the deceased owner's interest at that stage.

An alternative option to insurance through a buy-and-sell agreement is to borrow the funds required to purchase the deceased owner's share from a commercial bank. Even if the company is successful in receiving such a loan, the conditions and payback time may render it unaffordable in terms of cash flow. In most circumstances, insurance would be the most cost-effective option.

Solution?

A buy-and-sell agreement's purpose is to provide surviving co-owners with funds to purchase the stake of a deceased co-owner.

According to the agreement, each co-owner obtains life insurance on the lives of the other co-owners. When a co-owner dies, the life cover pays out, which covers the acquisition of his or her interest by the remaining co-owner (s).

Disability insurance can also be provided to pay the purchase of a disabled owner's share of the company.

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