The Importance of a Buy/Sell Agreement
If you run your business in a partnership, have you thought about what might happen if a key shareholder passed away or became too disabled to continue working in the business? It is important to ask yourself how your family, or theirs, would be paid for their ownership in the business without it significantly impacting the finances of the remaining partners.
A Buy/Sell Agreement allows you to stipulate what is to happen to your business shareholding should an unexpected event occur such as death or disablement. The agreement requires the remaining owners to buy the afflicted owner’s shares and in a lot of cases, the cost of these shares is met through an insurance policy which was put in place to cover the death or disability of an owner.
How income protection insurance and Share Purchase Agreements go hand in hand
By initiating a Buy/Sell Agreement, any insurance benefits are legally obligated to be used for the purposes that the insurances were established for. What this means for you, is that should you unexpectedly die, your remaining business partner will receive the lump sum benefit and therefore be obligated to buy your shareholding from either your family or estate.
The benefits of Share Purchase Agreement and the appropriate insurance in place are extensive. For example, should your business partner pass away, you will be able to focus on dealing with the impact of the death of your partner without having to worry about how you are going to purchase their share of the business. Also, your partner’s family will be able to receive the funds from the buy out of their share of the business in a timely manner – relieving them of the task of finding a buyer who could well be an unsuitable fit for the company.
What happens if I have insurance and I do not have a Share Purchase Agreement?
Should you have insurance with no Buy/Sell Agreement in place, your business partner could spend the proceeds from a claim however they wish. This could leave the deceased’s family with a shareholding in a company that they cannot run and ultimately the shares could decrease in value and become worthless.
Putting an agreement in place
Should you wish to put a Buy/Sell Agreement in place, each owner will need to see a lawyer as every business situation is unique. Here at Business Insurance NZ, we commonly deal with the insurance cover that is put in place for the purposes of establishing a Buy/Sell Agreement and we have a partner referral programme with reputable industry professionals who have extensive experience with Buy/Sell Agreements. Should you wish to request a phone call to discuss your situation further please click here.