One of the great problems of going into business with someone in a partnership, company or trust, is…. “what would happen in the event of the death of a partner or shareholder?” One of the major issues that arises is…”how will the business buy out the equity owned by the deceased person without financially wrecking the business and what will be the circumstances for the spouse of the deceased person, if they are unable to receive any payout for the business investment within a reasonable period?” A way of trying to reduce the financial burden in such an event is for the partners or shareholders to enter into a Buy/Sell Agreement when the business first commences and for this agreement to be reviewed every year, based on a valuation of the business. The agreement sets out the value of the partner’s/shareholder’s equity in the business at a specific date. A Buy/Sell Agreement is normally drafted by a solicitor. You should then arrange for an insurance company to issue life insurance policies on the life of the partner/shareholder, with these policies being owned by the other partners/shareholders.
The same situation would apply for each partner/shareholder in the business. In this way if a partner dies or suffers a very serious injury, the insurance policy would provide the funds which, according to the Buy/Sell Agreement, must then be utilised to purchase the deceased person’s interest in the partnership or the company. The benefit of a Buy/Sell Agreement accompanied by a life insurance policy, is that this gives some certainty to all of the parties as to what would happen in the event of the death or serious disability or illness befalling one of the partners or shareholders. It is important that the various parties receive independent legal advice particularly relating to the legal effect of the Buy/Sell Agreement and the effectiveness of the insurance policies that have been negotiated.
Another matter to bear in mind is that, as people age, they can have difficulty in attaining life insurance, therefore regularly reviewing the Buy/Sell Agreement and the amount of insurance cover is a way of insuring that there is an insurance policy to cover a significant amount of the individual person’s interest in the partnership or company, even though, at some future date, they might have had difficulty in obtaining a new insurance policy. If you would like more information on Buy/Sell Agreements please contact us.
