A buy-sell agreement involves the business owners entering into a written agreement to plan what they are to do with their respective interests in the business should any one of the owners die, become disabled, suffer a traumatic or terminal illness, resign or retire – just like having a will in place for the business.
Essentially the agreement should provide a mechanism whereby the terminating business owner can sell his or her interest in the business to the continuing owners, and whereby the continuing owners can purchase the terminating owners interest in the business.
The agreement generally also recognises the means of funding the buy-sell obligations of the respective owners.
The death, Total and Permanent Disablement or terminal illness, resignation or retirement of an owner can have a dramatic effect on a business. While resignation or retirement cannot be specially insured against, sudden death, total and permanent disablement or terminal illness can be insured through the Buy-Sell Agreement.
Note: All Buy-Sell Agreements should be written under legal advice.
Stan & Oliver’s Story
In 2003, Stan and Oliver started a business together. The start-up capital and purchase of business assets was valued at $500,000. Stan developed the business products and services. Oliver managed the administration and key relationships with their clients. Two years later Oliver died from cancer. The business value had increased to $1,500,000. Stan wanted control of the company, but Oliver’s wife, Wilma, wanted a fair value for Oliver’s share in the company, which she had inherited upon Oliver’s death.
Wilma refused to sell her shares to Stan unless he paid what she wanted. Stan said that he couldn’t afford to purchase the shares at the price Wilma was asking, as he couldn’t get financing from the bank now that Oliver had gone. Wilma looked to sell her shares to an outside party, but as there were problems with the business, she had difficulty obtaining a fair value. Wilma was forced to work in the business with Stan in order to support her and the family. Stan resented her being part of the business since she had no expertise in the industry. He felt he was doing all the work and sharing the profits with her.
Had Stan and Oliver taken out an appropriate amount of insurance, Stan could have paid Wilma for the shares and been free to run the business on his own. Wilma would have had funds to live on and would be free from the involvement in the business.
An appropriate amount of insurance would be 50% of the business value at a cost to the business. Provided by CommInsure Claims.
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