Buy and sell agreements: What is it? Why do you need it? How do you get it?

Buy and sell agreements: What is it? Why do you need it? How do you get it?

– Chanelle Taylor (Director, Cornerstone Financial Planning)

2020 has sadly seen many businesses suffer and close down, but it has also resulted in the emergence of highly innovative start-ups that are disrupting almost every industry in the world.  Many of these new businesses were started out of need and may not have had the luxury of a traditional, comprehensive business advisory process before opening.

This “race to trade” may have resulted in a few foundational business elements being neglected, such as well-drafted buy and sell agreements. If you opened a business during the last two years, this article is for you.

We believe in small businesses and the powerful, positive effect they can have on the South African economy. We thrive on assisting businesses to get off the ground, grow and prosper and that’s why we have put together a concise, yet full-bodied guide to the ins and outs of buy and sell agreements.

What is a buy and sell agreement?

At its core, a buy and sell agreement is a very simple concept. It is a binding contract between business owners that stipulates how and to whom a co-owner’s shares should be allocated in the event of his or her death. It protects all parties in the business, particularly the deceased individual whose estate may be left vulnerable without a properly constructed buy and sell agreement.

Why do I need a buy and sell agreement?

In the event of a co-owner’s death, the affected parties can be manifold. However, for the purpose of this article, we can roughly split the affected parties into two: 1. the deceased owner (and their estate) and 2. the remaining owners.

Each party will face unique, complex challenges if a co-owner passes away. If these challenges are not identified, discussed, and resolved while all parties are present, they will cause unnecessary conflict and stress among owners, staff and spouses – not to mention potentially harming the business permanently.

Having a well laid out, comprehensive buy and sell agreement will safeguard each party, their dependents, and the business. It is a 360-degree business solution that should be non-negotiable to every business owner.

Some of the challenges that may arise, which a buy and sell agreement could help solve, may include:

The potential challenges created for the deceased owner.

  • The remaining owners might not have the resources to purchase the shares from the estate.
  • The deceased owner’s spouse may not want to participate in the business which means that he/she is left at the mercy of the existing owners.
  • The deceased owner may have had unique skills that he/she brought to the business, meaning that the risk in the business increases if those skills are no longer available to the business.
  • The deceased owner may have earned a salary in the business, and when he/she dies the spouse cannot simply claim that salary unless he/she actively works in the business on the same basis as the deceased owner.

The potential challenges created for the remaining owners.

  • The executor of the estate of the deceased owner might interfere in a business about which he/she knows nothing.
  • He/she might want to sell the owner’s interest to the highest bidder, opening up the business to unknown external investors; and
  • The existing owners may not have the funding to repurchase the deceased owner’s interest at that stage.

How and where do I get one?

A buy and sell agreement is a foundational element of your and your business’s financial wellness and therefore, the best person to facilitate the drafting your buy and sell agreement is an independent, qualified and registered Financial Advisor. Not only will a financial advisor be able to spot possible threats within your business and personal finances, but they will be able to give you a holistic overview of how your business, estate and financial future intertwine.

If you have any questions or concerns regarding your business’s buy and sell agreements, estate planning or your personal financial wellness, get in touch with Cornerstone Financial Planning on 011 794 6611 or email info@csfp.co.za

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