Business Buy / Sell Agreements
Eventually all business partnerships come to an end. If a shareholder chose or needed to exit the business for health or other reasons, the immediate questions that arise could include:
- How much is their share of business worth?
- Should the remaining shareholders buy them out?
- Could the exiting shareholders share be sold on the open market?
- Will the exiting shareholder’s spouse want to take over?
- Will the remaining shareholders’ want the spouse to take over?
- What will be the impact on the business?
While the intention is always to manage an exit on amicable terms, the risk and expense can potentially be quite high. Planning for the inevitable event will provide a smoother path to managing this process and reduce the stress on the business and the shareholders.
The end of a partnership could come about on voluntary or involuntary grounds.
Voluntary grounds for a shareholder exiting include:
- retirement
- decision to pursue a business or lifestyle change
- implications from divorce
- bankruptcy
- criminal conviction
- a dispute between the shareholders.
Involuntary reasons for a shareholder exiting include:
- death of a partner
- total and permanent disablement
- critical illness.
The best way to plan for and manage a shareholder exit is to have a business succession plan in place, supported by a Buy / Sell Agreement. As a minimum the agreement must address the following key areas:
- Funding: How will the departing shareholder or their estate be compensated for their share in the business, taking into account the financial needs of the exiting shareholder, as well as the financial position of the business and the remaining shareholders.
- Legal Agreements: A set of contractual obligations to ensure the transfer of shares or units occur.
- Tax implications: A strategy should be put into place to effectively plan for and manage any tax liabilities arising from the Buy / Sell Agreement and the potential impact on the financial position of the exiting and remaining shareholders.
The financial aspects of any agreement may be funded by the business, individual shareholders or through insurance funding strategies. The later can be a particularly attractive solution for involuntary departures, where the needs of the departing shareholder and their family become a consideration.
It’s also important to note that depending on the circumstances, limitations to financial arrangements may apply, for instance when retirement or bankruptcy are the triggers for the split.
SUMMARY
Buy / Sell Agreements are an important means of:
- Planning for the end of a business partnership
- Ensuring the smooth continuity of business after the exit of one or more key shareholders
- Providing for and protecting the interests of the individual shareholders
- Anticipating and managing interactions with a shareholder’s family, particularly on the death of a shareholder
- Considering and utilising different funding options to ensure all parties receive a fair return, without causing financial hardship
- Managing the funding, legal and tax issues and requirements of an exit.
If you would like to find out more information about the benefits of Buy / Sell Agreements or would like us to review any current arrangements you may have in place, please contact Marc Peskett or Archie Para by calling our office on 03 9869 5900 or email us.
