Buy-Sell Agreements

Your Business Partner’s Spouse Could Be A Director

Meeting between Start-up directorsHere is the situation: You have partnered with someone and built up a great business with them. You have always worked well together. Suddenly, your business partner dies. It’s unexpected. His interest in the business is left to his heirs, in this case, his spouse. You know the spouse doesn’t have the right skills to run the business. You know that they never got along well with you either. Now you have a serious problem. You might want to buy their share out of the business, but you might not have the money, or the paperwork that gives you the right to do this.

It’s time to take some action, before anything happens to either you or your business partner.

You need to sit down and detail out some questions and answers.

  1. If one of you dies, becomes disabled or wants to buy out the business what should be done?
  2. Is there a way to agree upon the value of the business?
  3. Is there a business succession plan which will allow for a partner to buy the other out, buy the partners shares upon an untimely death or disability?
  4. Where can such an agreement be found? Is there a way to fund it?

The answer to these question is that you and your business partner need to create a Buy/Sell Agreement. This should be an important section in your business plan. It should lay out the details of what happens in the untimely event of a death or a disability of one of the partners. It should also lay out what happens in the event of a divorce of either partner. There are insurance policies that help to detail this out and can help to support the former partners spouse in the event of disability or death.

Here is an example:

Mark and Jeff own a business together. They call it M & J Ltd. They specialise in metal components that are utilised in energy projects. Neither of their wives are employed at the business nor do they take an active interest in it. Both men have a will. In their wills, the wives are given their full assets upon their death.

Example 1:

Mark went skiing where he is fatally injured in a fall. His wife is now the 50 percent owner of the business. She is desperate for money and she is liquidating all of his shares in the M & J Ltd. However, Jeff had to tell her that it is not possible as he simply cannot afford to buy it. Mark’s wife does not know what to do. She does not get his salary and has no clue what the business is all about. She is desperate, isolated and concerned that Jeff isn’t going to pay her anything. She heads to a lawyer to begin the process of selling her shareholding to anyone who will buy it.

Example 2:

Mark and Jeff thought of everything. They wanted to be sure that everything was covered so they talked to their commercial lawyer about buy/sell agreements. They arranged a buy/sell agreement to ensure that their wives would be covered if anything happened to either of them. They have a specific set of steps that they can take should the other one perish or become disabled. In this fashion, they can buy out the widow’s interest or the disabled partner’s interest.

They have a Life and Total Disability plan. Proceeds go to the family of the partner that is deceased or disabled. This is a better way to go and everyone wins with this sort of planning and insurance.

This is a simplistic view of the ideal situation but if you work with a commercial lawyer they can draw up the appropriate documentation so that your business is in the second and can keep trading relatively undisturbed rather than having to handle stressful and expensive legal battles over which you have no control.

To make sure your business is protected, talk to a North Shore law firm like McVeagh Fleming and Co about buy/sell agreements.