Often business partners starting out in a new venture recognise the need for a Buy and Sell Agreement (sometimes known as a “business Will”) as part of their business plan, writes TGB's Tom Mead
Often business partners starting out in a new venture recognise the need for a Buy and Sell Agreement (sometimes known as a “business Will”) as part of their business plan, writes TGB’s Tom Mead.
However, once the business is established this step is often forgotten.
The purpose of a Buy and Sell Agreement is to recognise the possibility that one of the business partners may die or become disabled and be unable to continue to work in the business. A professionally drafted Buy and Sell Agreement will spell out clearly that in such an event the surviving or continuing partner is able to buy out the deceased or disabled partner’s share, and continue operating the business.
It makes sense to consider this possibility and to reach agreement with your business partner about these issues, thereby saving your loved ones the trauma and heartache of having to enter into negotiations with your business partner for the sale of your share in the business. The last thing anyone wants is to be faced with the additional stress of such a situation when calamity strikes and you are unable to continue in the business.
It is common for business partners, when putting in place a Buy and Sell Agreement, to also set up life and disability insurance for each partner, to provide funds to enable the continuing partner to immediately pay out the disabled partner, or the family of a deceased partner.
A properly drafted Buy and Sell Agreement will clearly spell out the circumstances in which the remaining partner or partners of the business are able to purchase your equity in the business, and at what price, should the unthinkable happen.
Buy and Sell Agreements are crucial for the following reasons:
1. Family members are not dragged into business disputes upon the death or total and permanent disability of a loved one;
2. Upon the death or disablement of one of the business owners the business can continue with minimal disruption under the operation of the other owner or owners;
3. The business will be valued according to a pre-determined agreement and this prevents disputes and potential litigation in relation to the value of the disabled or deceased owner’s share of the business;
4. Family members can be financially protected in the event of death or total and permanent disability.
It will be important to consult both an accountant and lawyer when establishing your Buy and Sell Agreement. You will need to work out how to value your business, what will trigger the activation of the agreement and how the agreement will be funded.