Buy-sell agreement or business succession agreement

Do I need a Business Succession Agreement?

If you’re a co-owner of a business, whether structured as a partnership, company, or unit trust, having a Business Succession Agreement (also known as a Buy Sell Agreement or Business Will) in place is one of the most important steps you can take to secure the future of your business.

These agreements are essential where the ownership and management of your business are closely aligned.  A business succession agreement will help avoid disputes, loss of control, or financial uncertainty in the event of the death or retirement of a co-owner.

What is a Business Succession Agreement?

A Business Succession Agreement is a legally binding contract that governs what happens to an owner’s interest in a business if they exit the business, whether by choice or due to unforeseen circumstances like death, disability, or bankruptcy.

A well written Business Succession Agreement sets out the process under which the remaining owners may in the case of a voluntary departure or must in the case of death, disability, or bankruptcy acquire the interest of the departing co-owner.

A Business Succession Agreement is particularly important where ownership is tightly held and changes in control can have major business implications.

Why Should You Have a Business Succession Agreement?

A classic situation we have dealt with is where an owner dies and there is no Business Succession Agreement in place.  In this situation it can be that the remaining owners end up being in business with the family of the deceased owner.  This is because the owner’s family have inherited the interest of the deceased owner.  On the other side the owner’s family can get stuck in the business if there is no mechanism to sell.  The result is that the surviving owners end up being in business with the family of the deceased owner and the owner’s family end up being in a business where there is no structured exit strategy. A well drafted succession agreement avoids this and helps to:

• ensure the continuity of the business notwithstanding the death, retirement, bankruptcy or expulsion of an owner;
• ensure continuity of management;
• prevent the continued involvement in the business of a retired, inactive or deceased co-owner;
• create a certain value for the interest of the deceased, retiring or withdrawing co-owner;
• provide cash to for the estate.

When Does a Business Succession Agreement Take Effect?

The most common events which will trigger a buy sell agreement are:

• Attempt to sell:When a shareholder or a partner wants to sell his or her interest in the business, the remaining shareholders or partners can retain a right of first refusal.
• Death:The death of a shareholder or partner triggers an obligation in the agreement on the surviving owners to purchase the interest of the deceased owner.
• Disability: The disability of an owner who has been active in the business may trigger a buyout. The agreement would define “disability” and the means of determining the disability.
• Expulsion or Termination of Employment:An owner’s voluntary termination of employment or expulsion from the business may trigger a buyout.
• Bankruptcy: An owner’s bankruptcy or assignment for the benefit of creditors may also trigger a buyout.
• Loss of License:In the case of professional business loss of a professional license usually triggers a mandatory buy-sell obligation.

Funding a Business Succession Agreement with Insurance

A key challenge in any buy-out is funding. How will the remaining owners or the business pay for the departing owner’s share?

Often the continuing owners have insufficient cash or other resources to fund a buyout.

This can result in the seller or the seller’s estate having to accept an instalment payout or lesser amount.  The problem with an instalment arrangement is the seller or their estate continue to share the risks of the future profitability of the business.

There are essentially two methods for funding a buy out:

• The remaining owners incurring more debt by borrowing; or;
• They acquire life and disability insurance. The proceeds of which can fund the buyout.  This is the most common strategy.

Some Key considerations when using insurance are:

• How premiums are paid and whether there are tax implications;
• The valuation of the business for setting the insured amount;
• Whether the insurance payout is sufficient to cover the agreed buy-out price.

For older owners life and disability insurance can be expensive.

A properly structured insurance funded Business Succession Agreement not only ensures funds are available when needed but also protects the business, the remaining owners, and the exiting owner’s family or estate.

Call Lord Commercial Lawyers Today

A Business Succession Agreement, Buy Sell agreement or Business will is not just a legal document, it’s a business continuity plan. It gives certainty to all stakeholders and ensures that unexpected events don’t derail the business you’ve worked hard to build.  Whether you’re just starting out or have been in business for years, now is the time to put a clear succession plan in place.

Need help drafting a Business Succession Agreement tailored to your business? Call Lord Commercial Lawyers today on (03) 9600 0162.