Business Succession Plan – Agreements to Consider

Creating a Business Succession Plan is usually at the bottom of an owners list, unless the plan is due to be actioned in the imminent future.

But as confronting as it may be, in life and in business, it’s important to be prepared for the unthinkable. 

What happens if two business partners are running a business and one of them dies suddenly?

Is the survivor going to end up with the deceased’s spouse or estate as their new business partner?  Or, is there an agreement to force the buy-out?

How does the survivor suddenly come up with the cash to pay them out – especially if the bank won’t lend them anymore money? The surviving partner needs to be able to pay out the deceased within a reasonable period of time so that the deceased’s family can pay off their debts and move on.

The Estate will also want to make sure that they get a fair price for their share of the business so having a pre-agreed value makes a lot of sense.

Business owners also need to understand how the loss of a key person will affect the value and the profitability of the business.  You need to be confident that the business will survive the loss of that key person from a cash flow, productivity and therefore profitability point of view.  

You’re not just protecting your business – you’re protecting your family.

At DFK Everalls, we recommend you start planning in advance, even if you don’t intend to exit the business for many years to come.

We can ensure the process will be more manageable and the transition smooth for all the parties involved.

With that in mind – here’s what you need to start thinking about.


What is a Business Succession Plan?

Simply put, it’s a clear action plan for when a planned or unplanned “trigger” happens. It has three important areas:

Asset protection – protecting personal and business assets
Revenue protection – offsetting a reduction in business revenue
Ownership protection – funding an orderly transfer of business ownership

There are a lot of businesses out there who have no legally binding agreements in place. The potential for problems is high and more often than not, unfortunately – it happens. 

Business owners are figuratively walking through a minefield.


How can you protect yourself?

In an ideal world, a hand-shake would be enough for you and your partner to secure your business. 

But the reality is that it is not very practical, especially when each partner has their own interests to protect, like their families and estate.

Step One: A Third Party Facilitator

So that emotions don’t hijack events it’s a good idea to get an objective perspective. 

An experienced Facilitator can be an objective third party and act as an impartial, knowledgeable expert who knows the scenarios that your Succession Plan needs to cover.

Step Two: Get it in Writing

There are a whole range of legal areas at play when it comes to a business and that is what makes them both different and interesting. 

There is Family Law, Trust Law and Property Law just to name a few. 

This is why putting a legal agreement together is so important, so you can cover all your bases. 

At the end of the day, a verbal agreement is not worth the paper it is written on.

Documents you might need include

  • Shareholders/Partnership Agreement, 
  • Buy/Sell Agreement, 
  • Wills & Powers of Attorney and 
  • Insurance policies

Sound overwhelming?

That’s where the team at DFK Everalls comes in.


The Business Buy-Sell Agreement

There are several different types of agreements you can consider. 

A buy-sell agreement determines what happens to a business in the event of ‘trigger’ events, such as retirement, misconduct, a disability, or death of one of the owners.

It defines the owners’ rights and responsibilities upon the occurrence of these events and ensures there is a predetermined, legally enforceable way to deal with the situation.

It doesn’t need to be a separate document – you can include your intentions in your shareholder agreement or in your partnership agreement. Just don’t make the mistake of assuming that they’re already in there.

You’ll need to make sure the agreement outlines how the buy out will be funded. This generally involves taking out an insurance policy that covers the specific events outlined in the agreement. 

The business will also need to be valued. Some opt for their agreement to value the company at the time the trigger event happens. We also make sure to include how the value will be calculated at that time – whether that be agreed value, book value or an independent valuation. Specifics are important!

When we help our clients put this agreement together, we ensure each owner of the company gets tax advice. This is because the agreement could trigger both corporate and personal tax obligations, depending on each person’s circumstances.

The most important thing to remember when setting up your agreement is that every business is different. There are template buy-sell agreements available that you could potentially use.  While they can be useful as a guide, it’s worth remembering that a template is unlikely to cover all the elements of your unique situation. If you want to make sure your business is safe and secure, make sure you seek professional advice, 


Where to from here, for your Business Succession Plan?

At the very least, sit down and think about what would happen to your business if any of the trigger events we have mentioned, were to happen to you or your business partner.

We understand thinking about this is not a fun prospect! So let us help.

We can ease you through this process, as an impartial ally – who just happens to be an expert!

We can ensure your agreement is legally binding and specific enough to give you complete protection. 

Contact our team today if you want this peace of mind!


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