The need

Business owners spend a great deal of time and effort on the growth and development of possibly their most important asset, the business. Many entrepreneurs also consider it to be the source of their retirement capital or an income source for dependants. There is a pressing need for a business continuity plan, which will preserve this valuable asset in the estate of a business owner.

The solution

The business owners enter into a Buy-and-Sell Agreement. The essence of this agreement is this: Each owner agrees to purchase the business interest of a deceased owner at a predetermined price, to be
reviewed regularly as the business grows.

This agreement may also provide for:

  • A buyout in the event of the permanent disability of an owner.
  • The inclusion of non-owners, such as employees or industry peers, as buyers.

A Buy and Sell Arrangement has the following specific benefits:

  • It provides any surviving owner with a continuation plan for the business.
  • It is an essential element of succession planning in business.
  • The continued existence of the business is not in jeopardy as a result of the impact on personnel and creditors.
  • It provides certainty in respect of having a willing buyer at an agreed and fair market related price.
  • There is no risk of inexperienced family members of the seller becoming entitled to a share in the business by way of inheritance.
  • An owner gives effect to the intention to pass the business wealth on to dependants through a cash amount equal to the value of the business.
  • There is no risk of a scramble for large capital sums to fund the purchase of a deceased owner’s interest at a time when the surviving owners are unable to raise the required capital.
  • Employees have certainty of their future in a stable business.

Structure and implementation

The structure of the Buy-and-sell Arrangement is as follows:

All relevant parties enter into a written agreement, which in essence stipulates the purchase price, the share that each party will purchase and the conditions under which the sale will take place. In order to place each party in a position to discharge all obligations under the agreement, each party effects insurance on the lives of all the other parties. The policy owners are the premium payers, who are responsible to pay the portion of the premium that relates to their percentage of ownership of the policy.

It is important to ensure that the following never happens:

  • That a beneficiary nomination or a cession to a third party be effected on the policy, as this may adversely affect the estate duty status of the policy.
  • That the person insured under a policy pays any premium on it. Where there is an arrangement that premiums are paid from the bank account of the business, a corresponding debit must be done in the drawings account of each individual so that the premium is directly borne in that way.

Policy structure: The policy may be structured in one of two ways.

  • Single insured life policy, multiple owners:
    • Insured life: One business owner
    • Policy holders: All parties to the agreement, except the insured life
    • Premium payer: All policy holders in proportion to the share that they will
  • Multiple insured life policy, one owner
    • Insured life: All business owners
    • Policy holder: One party to the agreement