Do you know what will happen to your business if one of your company’s shareholders dies or loses capacity?
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.
Business Succession Planning is part of modern integrated estate planning, and your interest in your business may be a substantial part of your personal net worth. Good planning through buy/sell agreements and appropriate insurance can make all the difference. For many businesses, if no pre-existing arrangements are in place, the death of a shareholder can mean their shares in the company will go to the beneficiaries of that person’s deceased estate.
This can mean having an unknown person (the beneficiary of the shares) actively involved in the business or being an unwilling shareholder. In the alternative, the surviving original shareholders will have to finance the purchase of the shares. What effect will this have upon your personal finances, and on the cash flow of the business?
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 out 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. Amongst other things, the agreement determines how the company will be valued, and how shares can be disposed of in a variety of scenarios including death.
An experienced lawyer specialising in estate planning can help you to put a buy/sell agreement in place to manage succession and unplanned events, such as the death of one of the shareholders.
The buy/sell agreement defines how the company will be valued and how the equity will be managed. In many cases, the buy/sell agreement will state that each shareholder’s shareholding will be purchased by the surviving shareholders if one of them dies or becomes permanently incapacitated.
During the planning process, appropriate funding arrangements are put in place should the buy/sell agreement be triggered. Very frequently this is managed through an insurance policy.
If one shareholder dies, the insurance proceeds are used to purchase his shareholding for the benefit of the surviving shareholders. As a result, none of the shareholders are out of pocket or take on debt, 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.
Your Trusted Estate Planning Lawyer In Adelaide
It is important to see to it that the welfare of the business is upheld. For expert guidance on Succession Planning for your business, consult Genders & Partners. Rod Genders is an experienced senior lawyer who primarily focuses on Estate Planning in Adelaide and throughout South Australia. His boutique specialist law firm, which was founded on 1848, is one of the oldest and most respected in Australia.
Call us today on 08 8212 7233 for your free telephone consultation.