It’s time to start a company of your own!

You’ve put in the hours for a large corporate and now you finally decided that enough is enough and it’s time to venture out on your own. You’ve developed your winning idea, used Linkedin to partner up with college friends, funded yourself through your sizable provident fund withdrawal and launched your life’s work in the form of your business.

The first years are tough, no salaries, no benefits, high costs and many obstacles were overcome. Late nights, over-extended credit lines and personal investments are finally paying off as the business begins to grow. The business now has a healthy asset value and is profitable enough to grow the team, increase salaries, pay bonuses and contribute to the business’ own pension fund. At the start of the year, the business was awarded its first large scale private contract and the projected profits are looking healthy this year.

Suddenly, one of your dear friends pass on, it’s your business partner.

In the early days, directors, partners and shareholders of businesses are so concerned with creating more revenue and profit for the business  that they fail to consider the outcomes of the death of a shareholder.

So what happens to the business when a shareholder dies?

In the normal course of things, the shareholder’s shares would be distributed to his or her heirs as specified in their Will. That means that your partner can rightfully leave his shares to his 2 year old son or the likes thereof. The impact of this bequest means that your hard work may now be subject to the vote of new shareholder/s who are not as fit to run the business as your late business partner was. Furthermore, in order to liquidate the shares in a hurry a beneficiary may sell the shares off to whomever is willing to buy it, this may be a competitor intending on cannibalising your business or someone with unsavoury business practices. Worst of all though, should the remaining partners wish to re-acquire the shares from the beneficiary, they need to have sufficient cash on hand in order in order make the purchase. This is not always possible and may lead to unrecoverable cash-flow pressure and business or personal debt being raised.

Thankfully the solution is simple and elegant.

A Buy and Sell Agreement, is a contract between the shareholders of the business in which they agree that in the event that one of the partners pass away or become permanently disabled the remaining partners are required to purchasing the shares from the deceased partners beneficiaries at a pre-determined business valuation. The valuation of the business should be reassessed each year in order to ensure that the business is as accurately valued. Outdated valuations may lead to shares being under-valued when the agreement is enforced and may exclude recent business growth.

The buy and sell agreement enforces the requirement for the remaining partners to buy the shares back, but by itself it does not provide the remaining partners the cash required to buy back the shares.

This is where the Buy and Sell Policies come in. These are usually life insurance policies which payout on the death or disability of the insured partner and provide the capital for the shares to be purchased as per the respective agreement.

Conclusion

So as you grow your business into the giant you and your partners envisioned, consider protecting all the hard work you’ve put in by ensuring that you and your business partners have the necessary agreements in place and the policies to enforce it.

– TN