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Buy and Sell Agreement in Business Planning

Is it your wish to have the spouse of your business partner as your next business partner?

The issue is that you and your partner have worked together to build a business successfully. But you are sure that you don’t want to run the business with your partner’s spouse in the event your partner dies. In all likelihood your partner’s share in the business would go to their beneficiaries who lack the experience and qualification to contribute to the running of the business or you may not get along well.

Here’s what you have to do:

You may want to buy the exiting partner’s interest in the business, but you lack either the financing or anything in a contract entitling you buy at an approved price.

Ask these basic questions when you sit with your partners and advisers:

  1. In the event a business partner dies or become completely disabled, would you wish to purchase their interest in the business?
  2. Would you be able to mutually arrive at a means to value the business?
  3. If a partner leaves, dies or becomes disabled, should you set up a business succession plan that offers every partner the right to purchase other’s interest?
  4. What financing would you use for this type of plan, and would you set up a facility or strategy to finance it?

A highly recommended strategy is to include a Buy/Sell Agreement in your Business Plan and to specify that the risk of death or disability be financed by insurance. The funds needed by the remaining partners to keep control of the business, and to financially take care of the family of the exiting partner would be provided by the insurance.

Case Sample

Dave and Matt co-own a business, D&M Pty Ltd. The business is a producer of specialised metal parts for the oil and gas well drilling industry.

Their spouses are not employees of the company and don’t actively participate in the running of it. The partners have wills, which grant all of their assets to their respective wives.

First Scenario

Matt took a skiing holiday to Perisher where he had an accident and died. His death gave his widow a 50% interest in the business. She’s financially strapped and wishes to divest her late husband’s interest in the business. However, Dave has informed her that it’s not possible because he doesn’t have the money to buy her shares.

Matt’s wife doesn’t get his wage, and is clueless about the business. Because she fears that she won’t get anything from her husband’s share in D&M Pty Ltd, she went to meet a lawyer.

Second Scenario

Dave and Matt had thought of the possible consequences if one of them dies, becomes disabled, gets sick, becomes bankrupt or just wishes to retire. Their advisors had set up a buy/sell arrangement between them, which contains a specific series of actions to undertake to estimate the value of the business and buy out the shares of Matt’s widow.

To finance the buyout, the partners have bought Life and TPD andTrauma insurance for each of them, with the money to be provided to the family of the departing partner in exchange for the interest in the business.

Under this scenario, you can see the many problems that are often encountered by business owners and the solution for each one. Contact your financial advisor or accountant to set up a business planning strategy for you.

It pays to be prepared for any eventualities when it comes to your business, and planning in the event of death, disability or retirement of one partner is one of them. PJS Accountants offers a full range of services, including tax planning and compliance, accounting and SMSF services, and bookkeeping. For enquiries regarding our services, contact PJS Accountants.