If you own and run a business with others, it’s wise to consider what will happen if you or your business partners need to exit the business or are forced to sell. It’s incredibly easy for business owners to get caught up in the day-to-day activities of running their business, making it difficult to carve out time to look at the big picture. But planning ahead allows you to plan for contingencies and unexpected events.
For example, what would happen if one of your business partners…
- Could not work?
- Wished to sell your share of the business?
- Got sick or injured?
- Died?
- Suffered total / Permanent disability?
- Experienced trauma?
- Wanted to retire?
- No longer agreed about the operation of the business resulting in ongoing conflict between the partners?
What would happen if one of these scenarios occurred unexpectedly? Would it severely impact your business or even force the sale or closure of your business? Proper business and succession planning gives you the financial and procedural measures to move through such unexpected events smoothly.
A Shareholder Buy-Sell Agreement allows you to document a plan
A Shareholder Buy-Sell agreement can be an integral part of your business succession and estate planning approach. It will help you protect the business should certain unexpected events occur. Under a Shareholders Buy-Sell agreement, each business owner records their “share” of the business. They agree to take insurance over their business co-owners in respect of certain “trigger events”. The policy gives them the funds to purchase their co-owners shares in the business on the occurrence of a “trigger event”. Having the funds to buy out your co-owners in the event of their death, prevents their share of the business forming a part of their estate and being distributed to their beneficiaries. It allows you to keep control in the hands of the remaining co-owners.
What is a trigger event?
You can decide for yourself, but is usually death, total permanent disability or trauma. Your shareholders agreement can address issues such as:
- The sale of shares should one co-owner wish to sell
- The right of first refusal of shareholders
- Disputes between co-owners
- Forced sale of shares
- Valuation of shares should one party wish to sell
- Obligations of retiring/exiting shareholders
- Dispute resolution procedures where co-owner cannot agree
Shareholders agreements are not limited to company structures. They can be used by other business vehicles such as partnerships and other commercial entities and should be tailored to your business.
