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Secure a Watertight Business Succession Plan

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by John Sier, Principal, Mason Sier Turnbull Lawyers

What would you do if one of your partners unexpectedly exited your business? A buy/sell agreement, backed by insurance, can keep you afloat.

You’ve started a business with some partners. You’re off and sailing. What are the first things you do? Write a business plan? Decide on your 10-year goals? These and many other things are important, but something is often overlooked when businesses sail full-steam ahead: a buy/sell agreement.

The latter is a vital component in any business succession plan or shareholder agreement. To overlook it is like building a ship without a steering wheel, but we at MST sometimes find ourselves picking up the pieces for clients who’ve ignored its importance. These clients can be left with hefty debts, no control over financial decision-making – or have the near-impossible task of trying to sail a business single-handedly in a sudden storm.

Sink or Swim Scenarios

Here are some scenarios that could sink a business, but could also be successfully navigated with the help of a well-drafted buy/sell agreement:

  • One partner is declared bankrupt, leaving the others liable for the business’s debts.
  • One partner wants to retire and be fully paid out, but most of the business’s wealth is tied up in assets required to run the business.
  • One partner dies or becomes seriously ill, leaving the others to run the business and provide an income for the incapacitated partner, or the partner’s family.
  • A deceased partner’s spouse disagrees with the surviving partners on the value of the inherited shareholding.

Put simply, a buy/sell agreement controls what happens if a partner departs a business. This can occur if a partner dies, is disabled or otherwise incapacitated, or retires. Commonly, buy/sell agreements – whether freestanding or incorporated into the partnership or shareholder agreement – set out what events will trigger a buyout of the departing partner’s share in the business, and rules about who can buy it.

Be Assured, Insurance Counts

Buy/sell agreements should be backed by insurance policies to guarantee that there will be enough money to keep a business afloat when a buy/sell event is triggered. Lenders will also view an insurance-backed agreement favourably, which can help to improve your business’s borrowing potential.

A well-crafted buy/sell agreement can also deal with interpersonal and family issues, and is therefore an essential tool for managing family businesses, and for ensuring spouses and children don’t suffer as a result of poorly planned decision-making. Wills and life insurance go hand-in-hand with business succession planning, but are no substitute for an insurance-backed, watertight buy/sell agreement.

For further advice about buy/sell agreements and associated insurance policies contact John Sier on 03 8540 0200 or john.sier@mst.com.au