Planning is essential to the continued success of businesses. However, very often, owners of successful businesses spend most of their time and efforts on building up the businesses either solely or with joint-owners without having a proper leadership and business succession plan. The object of business succession planning is to effect a smooth transfer and succession of the business interests of the owners in the event of their retirement, withdrawal, disability or premature deaths.
WHAT IS A BUY-SELL AGREEMENT
The Buy-Sell Agreement is commonly used to effect proper business succession planning. It is a legally binding agreement between owners of a business for the purchase of each other’s interests in the business, upon the occurrence of any one of the abovementioned events.
OBJECTIVES OF BUY-SELL AGREEMENT
The objectives of the Buy-Sell Agreement are to:-
· Provide the funds (usually by way of insurance policies) by the continuing owners to buy over the outgoing owner’s interest in the business.
· Ensure a fair market value of such interest.
· Ensure ownership and control of the business remain with the continuing owners, and not any outside parties, including the outgoing owner’s family.
· Provide financial security for the spouse or the beneficiaries of the outgoing owner by having ready buyers for his business interest.
STRUCTURE OF A BUY-SELL AGREEMENT
The Buy-Sell Agreement will be between all existing owners of a business. The firm or company should also be a party to the agreement.
The Buy-Sell Agreement provides for the following terms and conditions:-
1. Each party to the agreement agrees that on the death or disability of any one of them, the continuing owners shall purchase according to the proportion of their shareholding the shares of the outgoing owner from his beneficiary or personal representative who is bound by the agreement to sell out.
2. Each party effects a life policy on his life for an insured minimum sum and assigns the policy to a trustee.
3. Each party agrees to maintain the life policy and pay all premiums, expenses and costs to keep it in full force and effect.
4. Each party agrees not to assign, mortgage, charge or otherwise encumber his interest in the life policy without written consent of all the other parties.
5. In the event of the death or disability, the proceeds of the life policy are paid to the trustee. The trustee makes payment to the outgoing owner’s beneficiaries (if the owner is deceased) or to him or his representative (if the owner is disabled) in exchange for the transfer of his shares in the business to the continuing owners.
6. In addition to the event of the death or disability of a party, the agreement also provides for the triggering of an option to buy and sell in the event of the following occurrences:-
(a) If an owner dies but the insurance company or trustee for some reason does not pay out.
(b) If an owner becomes of unsound mind.
(c) If an owner mortgages, pledges or gives security over his shares in the business without prior written consent of the other owners.
(d) If an owner is declared bankrupt or assigns his estate for the benefit of creditors.
(e) If an owner gives notice of intention to withdraw from the business.
(f) If an owner proposes to sell his shares.
7. Each of the continuing owners who desires to exercise the option must give 60 days’ notice to the outgoing owner.
8. If any of the continuing owners does not exercise the option to buy the outgoing owner’s shares, then those shares shall be offered to any of the other owners who have exercised the option in their respective proportion to the shareholding.
9. If none of the parties exercises the option to buy, then the outgoing owner is entitled to sell the shares to an outside party.
10. An incoming outside party is required to sign a similar agreement as the Buy-Sell Agreement.
11. A yearly Annual General Meeting of the business shall determine the fair value of the shares each year. In the case of dispute, the valuation shall be referred to the company auditor.