Shawn Perryman: Partner, Tomlinson Alliance Group Financial
Absolutely!
In a nutshell, a properly structured and insured buy-sell agreement ensures that the family of the deceased will receive timely fair market value for their interests. It further allows the surviving owners to continue the business quickly and efficiently, while minimizing disruptions in day-to-day operations.
Six key reasons why every partnership should take the time to implement a buy-sell agreewment:
•Guaranteed market: A buy-sell agreement protects the deceased’s family from being in an inferior bargaining position by creating a guaranteed market for the purchase of shares.
•Guaranteed capital: A fully insured buy-sell agreement ensures that the capital required for the purchase is available immediately upon the death of a shareholder. In addition, great tax efficiencies are created through the use of capital dividend account credits.
•Surviving owners: The agreement would allow the surviving owners to carry on the business without having the deceased’s spouse own shares. Having a non-active partner suddenly in an ownership position could put the shareholders at odds.
•Business valuation: The buy-sell agreement should outline the parameters to be used in establishing the value of the business. The agreement should provide mechanisms to monitor the value to ensure that the buy-sell agreement remains fully insured.
•Reassuring stakeholders: A fully-funded buy-sell agreement reassures employees, creditors, suppliers and customers that the company has a plan to continue the business despite the loss of an owner.
•Retirement: The agreement can also help to ensure the comfortable retirement of the business owner. By establishing the parameters for share valuation along with pre-defined exit clauses, shareholders can be bought out for an appropriate value.
Luca Citton: Associate, Boughton Law
Buy-sell agreements are recommended for all incorporated private businesses, particularly where shareholders are not all family members.
Generally, buy-sell agreements are perceived as agreements between a company’s shareholders that establish a framework for the transfer of shares in the event of a shareholder’s death, disability, matrimonial breakdown, retirement or conflict with another shareholder. Without this, the eventual transfer of shares under such circumstances can jeopardize the financial well-being of the departing shareholder and the business. As an added bonus, buy-sell agreements can provide comfort to employees, customers, suppliers and creditors with respect to the continuity of the business and job security.
Although a buy-sell agreement can stand alone, it often forms part of a more comprehensive shareholders’ agreement. In addition to issues covered within a buy-sell agreement, shareholders’ agreements address the respective obligations shareholders have to each other as well as to the business. Most shareholders’ agreements also set out means for dispute resolution and terms for the orderly operation of the business.
The issues typically contemplated and covered in buy-sell or shareholders’ agreements are not addressed in applicable provincial or federal corporate laws or a company’s articles. Although companies are not legally required to have a buy-sell or shareholders’ agreement, these agreements serve a useful purpose in filling in the gaps between corporate laws and the articles of a company when circumstances call for balancing the expectations and interests of all parties involved.
While the limited budget of a startup might not support the cost of retaining a lawyer to draft a buy-sell agreement or shareholders’ agreement, the up-front cost might save the company a significant amount of legal fees that will be incurred if a shareholder conflict results in litigation.
Janet Grove: Partner, Bull, Housser and Tupper LLP
An agreement between the owners of a business as to what triggers a requirement to buy or sell their ownership interest can stand alone or be part of a wider agreement that sets out how the co-owners intend to manage and finance the business and their ownership interests.
If there’s more than one owner in your business, having a buy-sell agreement is a good idea. Regardless of the type of business, it’s wise to consider the various “what ifs” that come with having co-owners and decide in advance how to handle them.
Buy-sell agreements typically cover:
•What happens to a co-owner’s interest in the business if he or she dies? Will the other co-owners buy out the deceased owner’s interest or allow it to be transferred to any heirs?
•If the co-owners work for the business, what happens if they leave or retire?
•What happens if one wants to sell? Do the other co-owners have the first right to buy that interest before it’s offered to outsiders? Can a co-owner sell to a competitor?
•How will the buy-out price be determined, and when will it be paid?
•Will the business take out life insurance on the co-owners to fund a buy-out?
•Do the co-owners want a way to trigger a sale by one to the other if they no longer get along?
•If a majority want to sell, can they force all co-owners to sell?
Because they’re meant to plan for the unpredictable, as well as the potential for a breakdown in relations between co-owners, it’s always better to consider and prepare a buy-sell agreement at the outset of a business or co-ownership relationship.
