Having a Buy and Sell Agreement in place is essential for both succession and estate planning.  In the event of you or one of your business owners passing away or becoming disabled, it is vital to ensure the continuity of the business and to provide reassurance that the wealth locked-in to the business can be enjoyed by the affected family.

Risks upon the death or disability of a co-owner:

  • The heirs do not have security that they will be paid a fair price for the interests
  • The remaining owners may not have immediate and clear ownership; negotiating with heirs or delays relating to the winding up of the estate might complicate the continuation of the business
  • The remaining owners may not have sufficient cash available to buy the shareholding
  • In order to fund the purchase, the capital resources of the business may be drained

The agreement to buy and sell a business shareholding in the event of a death or disability can be structured in two ways, between individual shareholders (Buy and Sell Agreement) or between the company and a shareholder (Share Buy Back).  A typical buy and sell agreement is where all shareholders agree to sell their shares in a business upon their death or disability, to all the remaining shareholders, in proportion to their interest in the business.

Realistically, many shareholders and businesses don’t have the excess liquidity to purchase the shares of a shareholder unexpectedly.  The simplest solution is to put a policy in place to fund the purchase of the shares. Each shareholder takes out a policy on the other’s life, which funds the purchase of their interest should the time come.

Common mistakes:

  1. Not all parties sign the buy and sell agreement
  2. The business, rather than the co-owners, owns the policies
  3. The business pays the premiums on policies owned by the individual parties (and even deducts the premiums for income tax purposes) without accounting properly for them.
  4. Some businesses pay the premiums and divide them equally amongst the shareholders.
  5. Under or over-insurance, which can result in donations tax or negative estate duty implications
  6. The method of valuation does not reflect a realistic value of the business.
  7. Often the policy benefits are not aligned to the requirements as set out in the agreement.
  8. The agreement is not updated to reflect ownership changes and business value fluctuations.
  9. The Buy and Sell Agreement and Memorandum of Incorporation often contradict each other (the latter overrides).
  10. In order to ensure peace of mind the owner’s spouse is nominated as the beneficiary of the policy.

Conclusion

We recommend that the Buy and Sell agreements and life assurance policies underlying these be subjected to regular review in order to ensure their validity and fit with your estate plan.   Should you require any assistance with business assurance structures and policies to complement your Buy and Sell agreements, please do not hesitate to contact Independent Wealth Managers.

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