If you’re running a business with partners, having a buy-and-sell agreement in place is crucial.
But why, you may ask? The answer is pretty straightforward.
Here’s the deal: When you pass away, your shares in the company become part of your estate or transfer to your business partner as per your shareholder’s agreement. If there’s no clear plan in place, those shares end up in your estate, to be distributed according to your will.
Enter the buy-and-sell agreement – your solution to these issues. This agreement is backed by life insurance policies on each partner’s life, ensuring enough cash to cover the purchase price. Simultaneously, the agreement establishes the obligation to sell the deceased partner’s shares and the obligation for the surviving partner to buy them.
Now, let’s talk about the risks:
- Insufficient cash: The remaining owners might not have enough cash to buy the deceased partner’s business interests.
- Uncertain fair price: Heirs might not be guaranteed a fair price for the business interests, potentially leading to a forced sale.
- Ownership complications: The remaining owners might face unclear ownership, dealing with heirs or delays in estate settlement.
- Business capital drain: Funding the purchase could drain the business’s capital, jeopardising its continuity.
On the flip side, the benefits are significant:
- Business continuity: The business keeps going without outside interference.
- Smooth transition: Funds are available for a timely conclusion of the transaction.
For dependents or beneficiaries, the advantages are:
- Inherited capital: They receive a capital amount instead of dealing with a business they may not know.
- Financial security: The received capital can replace lost income and contribute to overall estate planning.
Now, let’s consider the importance of a shareholder’s agreement:
This agreement, entered into during the partners’ lifetimes, governs their relationship and outlines what happens to shares in the event of death or retirement. Without it, shares become part of the deceased partner’s estate.
And remember, getting the structure right is essential to qualifying for estate duty exemption. The Estate Duty Act provides exemptions if specific conditions are met.
In conclusion, a buy-and-sell agreement is vital for protecting interests and ensuring the intended transaction occurs. Without it, disputes can end in costly and time-consuming court battles, benefiting no one, especially not the deceased owner’s beneficiaries.