If you are in a business with shareholders, your business faces a major potential threat if one of your fellow shareholders dies or becomes permanently incapacitated.
Often the estate beneficiary wants nothing to do with the business and just wants to cash out the shares as quickly as possible and get on with their life.
Very few businesses will have the liquid cash reserves readily available to quickly buy back the deceased’s shares, and there is often a difference of opinion as to how the deceased’s shares are to be valued:
- Should goodwill be taken into account?
- What multiple of earnings should be adopted?
- Do you calculate the business’ net worth as assets minus liabilities?
- Or value it based on the business’s income or profits and the expected return on investment?
An experienced estate planning lawyer in Adelaide can help you clear up these questions with a buy/sell agreement.
What is a Buy/Sell Agreement?
Buy/sell agreements are legal documents that define what happens in an event that may trigger the disposal of a shareholder’s interest in a company.
The agreement determines how the company will be valued, and how shares can be disposed of in a variety of scenarios including death.
It defines how the company will be valued and how the equity will be managed.
If one shareholder dies, the insurance proceeds are used to purchase his shareholding for the benefit of the surviving shareholders.
As a result, the surviving shareholders own an increased share of the business, and they avoid having an unplanned shareholder running the company. The business continues as planned.
For expert guidance on Succession Planning for your business, consult Genders & Partners. Request Your FREE 15 minute preliminary Telephone Consultation Today! Call us on (08) 8212 7233.