Ownership Protection: The Buy-Sell Agreement

No matter how a business is structured, it requires a mechanism to transfer the equity or control of the business in the event that the principle owner or manager is unable to continue.  This also applies to the members of the board, and senior management.  This is why a buy-sell agreement is necessary.

A buy-sell agreement is a legal contract that outlines the details of how the ownership of a business will be managed upon the death or serious disablement of a partner or shareholder  It provides clarity and certainty regarding the future ownership and operation of the business.

Ownership protection is important for several reasons.  The control and future ownership of a business may have to be reconsidered if one of the partners or shareholders passes away or be unable to continue due to disability or critical illness.  This prevent situations where funds may not be available, the value of business under contention, and beneficiaries may be disadvantaged.  For example, banks may cease to provide credit, or leverage, and give a notice of assessment.  Creditors may call in debt should they be unconvinced of the business as a going concern.  Ownership protection through buy-sell agreement will ensure existing shareholders receive a fair share of the company.  An appropriately structured series of life insurance policies mitigate risk, and provide surviving shareholders some funds to compensate the estate of the deceased without compromising shareholder, and retain control of the business.  The payout is also important because there is a cost for the executive search for a suitable replacement, and this would take time.

The process of using insurance for buy-sell agreements is not complicated.  A specialist lawyer can prepare the buy-sell agreement after the shareholders have discussed and agreed accordingly.  It is important that the agreement is reviewed annually to ensure all shareholders are still in agreement with the terms, and they still accurately reflect the current needs and value of the business.