IF YOUR PARTNER DIES, WILL YOU HAVE THE FUNDS TO BUY HIS SHARES?
You have worked hard to build up a business which is a valuable asset. Just as the business needs you and your loyal staff, so you and your staff need the security provided by the business. One of your prime objectives, therefore, should be to make provision for business continuity. If you wish to ensure continuity of your business then read on…
THE PROBLEM
If one of the co-owners of a business were to die or become disabled, what would happen to that person’s share of the business?
Outsiders may obtain a controlling interest.
Remaining members/shareholders may be unable to afford the deceased’s interest or shares
Remaining members/shareholders may not be interested in purchasing the deceased’s share of the business.
THE SOLUTION
The co-owners incorporate into their partnership agreement an undertaking to purchase the interests of their fellow co-owners should any of them die or become permanently disabled. This agreement is designed to ensure the continuity of the business on death or permanent disability of one or more co-owners in a business. The agreement includes an undertaking that the first dying/disabled will, on his/her death, sell his/her interest to the surviving co-owners.
BUY & SELL ASSURANCE
The agreement also stipulates the means of funding such a purchase. The most common method is via a series of life policies. The policies provide cash to facilitate the purchase of a deceased’s interest in the business, thus ensuring business continuity and the financial welfare of a deceased dependants.
HOW DOES IT WORK?
A co-owner effects a policy on the life of another co-owner and vice versa. Each co-owner will consequently own a policy on the life of every other and pay every premium under the policy which he owns. When more than one shareholder/member is involved, the policy on the life of each shareholder/member will be co-owned by the other shareholders/members proportionate to their interest in the company.
BENEFITS TO THE HEIRS OF THE DECEASED CO-OWNER
Certainty regarding the sale of the deceased co-owner’s interest in the business
A purchase price negotiated by the parties concerned, ensuring that they receive the full value of the co-owner’s interest in the business
An immediate cash payment, which can substitute the income lost a as a result of the death of the breadwinner.
BENEFITS TO SURVIVING CO-OWNERS
Certainty regarding the future ownership of the business.
The business can carry on with minimal disruption
No risk of new co-owners (eg the spouse of the deceased) joining the business who might be unskilled or incompatible, or, in the case of a company, receive dividends although they have made no contribution.
An inexpensive way of funding the purchase price.
PARTNERSHIP AGREEMENT
Whether incorporated or not we recommend all individuals trading together to enter into a written partnership agreement.
This agreement should deal with matters such as:
Responsibilities in the business
Remuneration and benefits
Committed working hours
Outside interests
Financial contributions and commitments
Sureties
Sharing of profits and losses
Drawings
Leave
Sequestration of a partner
Termination and notice
Death or disability
Restraint of trade on termination
Dispute resolution