Your business shareholding through a Buy and Sell Agreement and the right level of life insurance

Article by: Jannie Rossouw

Head: Sanlam Business Market

A Buy and Sell Agreement is a critical consideration for business owners with a shareholding in an enterprise, says Jannie

Rossouw, Head of the Sanlam Business market. It constitutes a written agreement between the owners of a business entity, obligating themselves on their deaths or in the event of permanent disability to sell their interest

to the survivors. Likewise, it commits the survivors to purchase the deceased member’s interest.

In most cases, the personal assets of the various partners are tied up in the business, as profits are often kept in the business. Rossouw believes life assurance is the only safe and sound and the most affordable way of creating the necessary funds in terms of the agreement. “The members or partners and shareholders agree to terms of which they affect policies on each other’s lives. The co-owners other than the assured pay the premiums. If a credit loan

account exists, it can be included in the Buy and Sell Agreement by including the loan account amount in the cover on the

life of the creditor.” Rossouw says that in the absence of a bona fide agreement, the surviving owner(s) may

be faced with serious challenges.

A Buy and Sell Agreement, however, gives the surviving owners immediate, full and unhindered ownership of the business:

•              Funded by insurance, it provides the ready cash the moment it is needed.

•              The surviving owners pay a fair value (if the level of insurance was continuously aligned with the value of the business) for the acquired share of the business and hence the needs of the deceased owner’s heirs are also met. It prevents the business from being drained of its capital resources.

•              Instead of borrowing money and paying interest, a life policy is usually much cheaper and readily available.

Rossouw says the unfortunate scenario of a business owner losing his interest in a business plays out time and again in

businesses around the world. He warns that the death of an active co-owner or partner can place untold strain on both the business and the surviving partners with dire consequences. “It is critical for business owners to be prepared for unforeseen events that might affect their businesses. This can include the sudden death or departure of a business

partner. Disaster can be avoided if business partners have an up-to-date buy-and-sell arrangement in place.” Rossouw explains that a buy-and-sell arrangement consists of two parts: The first part is, the buy-and-sell agreement, referenced earlier, which compels a surviving partner to purchase a deceased partner’s shares from the estate and compelling the executor to sell. He explains that the second part of a Buy and Sell Agreement refers to a set of insurance policies over the co-owners’ lives, usually equivalent to the market value of their respective share in the business.

A buy-and-sell arrangement enables the remaining owners of a business to choose who their future business partners

will be while protecting the businesses’ profitability and continuity. He says it also gives the family of the deceased partner

the assurance that they will receive a market-related price for the deceased partner’s share of the business.

“Business owners should ensure that such structures are in place by consulting with a qualified adviser or an accredited broker,” Rossouw says.

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