Business Succession
Business Succession for Ongoing Businesses
Many people establish their own business not only for the hope of generating profit, but with the intention that a family member will receive the benefit of your efforts when you become closer to retirement.
It is important to obtain proper legal advice as to your options regarding your business succession planning, particularly in circumstances where you have one or multiple business partners. It is always important to protect your interest in a business.
Having a proper business succession planning agreement and appropriate insurances in place can be the difference between a successful continuation of the business, or its financial demise.
In NSW, there are two (2) main agreements that business owners should consider when looking at their business succession planning:
- Buy/Sell Option Agreement; and
- Shareholders Agreement
Buy/Sell Option Agreement
A Buy/Sell Option Agreement is a document that allows co-owners of a business the option to buy or sell their respective share in the business upon the occurrence of an ‘Option Event’. This Option Event usually includes the following:
- The death/injury/permanent disability of a co-owner;
- Serious illness of a co-owner; and
- The retirement or expulsion of a co-owner (if not already dealt with under a partnership agreement).
Buy/Sell Option Agreements provide clarity on issues relating to the following:
- How the shares will be bought/sold;
- How the respective share of a co-owner in the business is valued;
- Who is able to purchase the co-owners’ interest;
- Whether the co-owners’ spouse/children/nominated beneficiary is able to keep the co-owners’ interest and participate in the running of the business; and
- When the co-owners’ share is to be paid.
Shareholders Agreement
A shareholders agreement is a document between two (2) or more co-owners of a business setting out:
- The roles and responsibilities of each person; and
- The rights and obligations of co-owners in the event of a dispute or proposed sale of their interest in the business.
Shareholders agreements can also set out provisions relating to the management and control of the business, such as:
- The purpose of the company;
- The running of meetings;
- Voting and decision making on behalf of the Company;
- Budget reviews;
- Company funding options;
- Restraint of Trade; and
- Confidentiality clauses.
Shareholders Agreements are drafted if the co-owners have set up a company. If you have not set up a company, then you would draft a ‘Partnership Agreement’, which would include many of the same provisions as a Shareholders Agreement.
It is important to have Shareholders Agreement/Partnership Agreement so that there are no disputes moving forward as to the direction and growth of the business. In particular, these documents are vital for business owners so that the business ‘remains’ with the original owners of the business. Quite often, when co-owners decide to leave or move away from the business and establish another business, there can become issues as to how that person’s interest is to be dealt with. Furthermore, that co-owner may attempt to ‘take-over’ the original business through the establishment of their new business.
Co-owners do not turn their attention to the cunning nature of the business realm and the fact that there are many pressures associated with running a business. It is important to ensure that your interest in the business is protected, not only for you, but for your family as well in the event of your death.
Insurances
When a co-owner exercises their right to sell their interest in the business, you and your other co-owners are now faced with the responsibility of determining how to source the appropriate funding to enable the purchase. You may have the option to enter into a finance agreement, or you may have appropriate insurance policies that will provide the appropriate funds to purchase the interest.
This becomes particularly important in the event of a death of a co-owner. As a general rule, upon the death of a co-owner, that person’s interest becomes vested in that person’s beneficiary under a will. An appropriate insurance policy would allow you to pay the beneficiary that persons interest in the business, ensuring that no unwanted third-party is able to make decisions as to the running of the business.
It is important to understand the exact nature of your business so you know what type of insurance policy will work best for you. Whilst one policy may work for you initially, it will be recommended to review your policy regularly to ensure that it best fits your circumstances. Be mindful that there may be tax implications on the event of an insurance payout, and different tax implications apply on death benefits and non-death benefits.
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