Having reliable partners who share your vision and work well with you is essential for business success. In the beginning, you might not have thought much about the impact of losing a partner to death or disability. Back then, focusing on a good product or service and putting in the effort seemed like all it took to succeed, without worrying about the financial implications of buying out a partner’s share.
As a company grows, however, planning becomes essential to ensure that you can navigate the unexpected. Typically, a partnership, close corporation (CC), or private company ensures that the existing owners will all have a say, should a new owner join the business. However, the question of ‘what if’ arises when an owner cannot participate in this decision-making process due to death or permanent disability.
Dealing with an owner’s unexpected death or disability
Losing one of the business owners to death or disability has all kinds of ramifications for both the surviving owners, and the affected owner and their family.
The ownership of the business interests held by the deceased will be considered part of their estate property and will be managed according to the instructions outlined in their will.
This brings about the following considerations:
For the deceased partner:
- Does the family of the deceased, who inherited the shares, want to be involved in the business?
- Is it necessary for the executor to sell the deceased’s business interest to generate liquidity for the estate?
- Is there an outstanding loan account that the executor intends to settle?
- Will the deceased’s family face the loss of their source of income?
For the surviving owners:
- Do the remaining owners have sufficient cash to purchase the deceased owner’s business interest, or to repay any loans that the deceased partner signed surety for?
- Will the introduction of a third party as a new owner (deceased’s beneficiaries) be disruptive, or impose financial strain on the business?
- If the surviving owners don’t have sufficient funding to purchase the business interest, the late partner’s spouse or descendants might have to step in as new owners without having any knowledge about the business.
By implementing a buy-and-sell agreement, that speaks to the relevant business agreements like the memorandum of incorporation (MOI) and shareholders agreement or an association agreement in a CC, the owners remove the uncertainty illustrated above. The agreement between the owners is often coupled with life assurance policies that provide liquidity, enabling the surviving owners to purchase the deceased or disabled owner’s business interests.
Benefits to deceased/disabled owner:
- The business interest of the deceased/disabled owner will be sold to the surviving owners.
- The family will get full and fair market value for their share of the business in cash.
- Outstanding credit loan accounts can be settled immediately.
Benefit to the surviving owners:
- Being able to purchase the business interest from the estate of the deceased/disabled owner.
- Prevent a third party or a member of the deceased’s family from entering, and potentially disrupting, the operations of the business.
A properly structured buy-and-sell agreement, that is relevant with up-to-date valuations, is as important as your MOI and shareholders agreement.
Please let us know if you would like to revisit your current business agreements or if you have any questions about the continuity of your business in case of the unexpected.
This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein.