Business Succession Key to Long Term Success

The importance of key individuals to a particular business is normally recognised in the form of appropriate remuneration and, if relevant, promotion. However, what happens if a key person suddenly leaves the business, is totally and permanently incapacitated or dies? Suddenly that person’s true worth to the business may become glaringly apparent.

Unless properly planned and executed business succession can easily prove the downfall of a business.

One method of minimising the disruption that results from the involuntary departure of a key person from your business is the use of a “buy-sell agreement”. Like a properly drafted will, a “buy-sell agreement” regulates what happens upon the involuntary departure of a principle or key person from a business.

In the absence of an agreement of this type, an involuntary departure could result in a host of undesirable consequences including:-

(1) dissolution of the business;
(2) an interest in the business being acquired by beneficiaries who do not possess the requisites skills, experience or desire to contribute to the business or be compatible with the surviving partners; and
(3) the triggering of unwanted capital gains tax liabilities

A “buy-sell agreement” is designed to provide the continuing partners/shareholders in a business with an ability to control the future of the business, while at the same time ensuring the leaving partner or his/her dependants receive full and fair value for their interest in the business. This is achieved by providing the surviving partners/shareholders with a right to purchase the departing partner/shareholder’s share in the business – and the deceased’s estate the entitlement to sell – at a previously agreed price or a price calculated by reference to a previously agreed formula.

The funds to purchase the departing partner/shareholder’s interest would normally be supplied via an insurance policy that is activated by the death/incapacity of that partner/shareholder.

Ultimately, the aim of any “buy-sell agreement” or similar document should be to provide the particular business with a method of achieving its ongoing business requirements and objectives in a flexible manner while at the same time ensuring the assets of the business are protected.