​Business Ownership

Losing a shareholder or business partner
The loss of a shareholding director or business partner can have a dramatic impact on a business. Would your business survive if one of the owners were to die prematurely, suffer a critical illness or become totally and permanently disabled? Who would take their place – not only in performing their day-to-day role, but also in deciding how your business is run?

Appropriate shareholder protection, coupled with a suitable agreement such as a buy-sell agreement, ensures your business can continue should one of your business partners become seriously ill, injured or even die.

Imagine if one of your business partners were to become critically ill or die. Not only could your business suffer financially, but you could also be forced to work with someone else. Who would control your business?
That person (it could be someone you do not know or trust) may have no knowledge of your business and no interest in it. However, because they own a share of your business, they would have just as much say as your fellow shareholder did before they died.

Consider the following:

• Could your business continue if one of your partners were to die, suffer a critical illness or be disabled and unable to work?
• Could you work with a new, possibly unknown, person if they inherited a shareholding? Would they want a say in the running of the business?
• Do you and your partners/fellow shareholders have the funds to buy out your partner (or their estate)?
  

What might happen to your business? 

• The business may suffer losses which will impact all business partners and their families, until resolved.
• Your new business partner might want to sell their share of the business. This could be to a competitor or some other unsuitable buyer.
• You may be forced to wind up or sell the business.
• Your new business partner may wish to become involved in the business, which could be disruptive and possibly unacceptable to other owners of the business.
• You may need to buy your new business partner out to keep a controlling interest.
• The remaining business owners may end up doing all the work, but splitting the profits with the new non-working business partner.

Unless, of course, you have a buy-sell agreement in place with adequate funding.

What is a buy-sell agreement?
A buy-sell agreement involves the business owners entering into a written agreement; setting out what would be done with their business interests should they die, become disabled, suffer a traumatic illness, resign or retire.
There are two essential parts to a buy-sell agreement:

1. The needs of the business are established and an effective plan is put in place. The plan will set out the guidelines for the transfer of ownership interests in the business in the event of certain contingencies, such as death or incapacity.
2. The plan is implemented with the appropriate funding. Once a buy-sell agreement is set up, insurance policies (or savings) are used to fund any obligations.

A buy-sell agreement should be set up in consultation with your solicitor.

How much cover do you need?
The sum insured should generally be the same as the agreed value placed on each business owner’s interest, as determined by an annual valuation.
For example, if the business has two owners and is valued at $300,000, the sum insured on the life of each business owner should be $150,000 (assuming equal ownership).
The level of cover should be reviewed annually to ensure the sums insured always reflect the market value of the business.