A Business Will, or a Buy-Sell Agreement, is something that I strongly encourage all my clients who are business owners to have.
A properly drafted Business Will, will allow for the smooth transition of a business partner unexpectedly departing the business (for various reasons such as total and permanent disability or death of an owner) and provide the remaining business partners with the ability to take quick control of the business without the financial pain.
Advantages of a Business Will
Frustratingly, a Business Will is a document that most business owners agree is a good thing to have in place, but never get around to actually doing. There are plenty of advantages for having a valid Business Will in place, for example:
- Business partners are not forced into business with an inexperienced member of the affected partner’s family;
- The business continues smoothly notwithstanding the death or total and permanent disablement of an owner;
- Adequate funding ensures that the affected partner’s family standard of living is maintained in the event of death or total and permanent disablement; and
- The possibility of conflict is significantly reduced.
Preparing the Agreement
Prior to preparing the Agreement, you should arrange a time to speak with your accountant and solicitor to get a full understanding of the potential tax implications and legal traps. In particular, the following needs to be considered and addressed:
1. Determination of value, by either:
- An independent valuer;
- A valuation methodology or formula;
- A periodically agreed value (ie, the value is agreed from time to time).
2. The Triggering Events, for example:
- Death;
- Total and permanent disablement (TPD); and
- Trauma.
3. Funding the payout; and
4. Tax consequences, including tax consequences if the payout is funded by insurance.
Funding the Agreement
There are many ways in which a business owner can fund this type of Agreement:
- Funding through insurance;
- External borrowing by the continuing principals;
- Sale of the exiting party’s interest to a third party;
- Self-funding by the continuing principals from other resources;
- Vendor finance (often using the business cash flow over a number of months or years).
Where there is a shortfall, the Business Will should provide for how the unpaid balance is to be paid.
Tax consequences
It is very important to get advice from a lawyer or accountant experienced in this area, to avoid any unwanted Capital Gain Tax consequences.
It is easy to see why a Business Will is an important component for business planning. When done properly, the Agreement can make the transition for all parties much smoother despite the difficult circumstances.
If you have any questions relating to Business Wills, please do not hesitate to contact me.
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