Every business owner should have a properly constructed ‘Buy-Sell Agreement’ in order to protect the owners/shareholders value in the business and ensure the continuity of the business if there’s a ‘triggering event’. Currently in Canada, only 1 in 3* has one. Over the years I’ve seen too many businesses get in trouble because the wishes of the business owners aren’t in a legally binding document. Business owners often think they’ll live forever, work forever, and get along perfectly with their business partners forever. Clearly this isn’t the case.
‘Buy-Sell Agreements’ consists of 3 common elements:
- Triggering Events – The most common of these are death, illness, retirement, and marital breakdown. The ‘agreement’ can address how to dispose of shares/shareholders in each of these events. The remaining shareholders should consider the ways to transition through these events. Who gets the shares after one of these events happens? It’s very important that these scenarios are all considered. I’ve seen them all happen, often with disastrous outcomes.
- Valuations – Having an agreed way to value the shares of the business ensures all parties are on the same page. Some businesses set the price annually, some use a predetermined formula and others agree to use a certified business evaluator or accountant to help determine this amount. Once all shareholders are on the same page, they can plan for retirement or simply know what their business is worth in the event of the sale of the shares.
- Funding Strategy – The use of insurance is the preferred funding method for most Buy-Sell Agreements in the event of a shareholder’s death or disability. Insurance premiums can be paid by the corporation to insure the lives of the shareholders at a valuation that is predetermined. This is very reassuring for all parties. For a retiring shareholder, pre-determined financing arrangements are also strongly encouraged. Sometimes a lump sum payment via a loan is used, other times it’s a combination of lump sum and monthly/annual payments to the departing shareholder.
A well drafted ‘Buy-Sell Agreement’ shows existing shareholders and potential purchasers that the business is properly managed, has stable continuance in the event of a ‘triggering event’ and has a stable financial method for dealing with the transition of shares.
I strongly encourage my business clients to reach out to me to have one of our preferred legal/accounting professionals help with this. This will ensure that your individual needs have been considered and the business can grow and transition forwards indefinitely.