The Importance of Getting the Future of Your Business in Writing: Buy-Sell Agreements and Shareholder Agreements
You are a business owner in business with another individual (or individuals) under a partnership or corporation. As soon as possible – ideally at the beginning – you should go to a lawyer to get your agreement drafted. In essence this is the rule book for the operation and/or responsibility of each person. Establish this early before any potential problems arise so you know how to deal with them.
Four areas that need to be addressed (among others) are as follows:
- What happens if one of the individuals becomes disabled
- What happens if one of the individuals dies
- What happens if one of the individuals wants to retire
- What happens if the parties don’t want to be in business together anymore
There is also the important issue of valuation, i.e. how do you determine what the value of the business is today? I recommend to my clients to get advice from their CPA on valuation, and agree to sign off on that valuation yearly (assuming there is agreement among the partners or shareholders). This will be very convenient if one of the people becomes disabled or dies.
Further, a good business lawyer will be able to draft the agreement to include all of the necessary clauses, including the four main areas listed above and the valuation piece.
I’ve had clients who lost an owner on the team to a long term disability (usually a buyout will be automatically triggered upon a 12 month disability). There will be a number of months in which payment must be made to the disabled owner and the valuation you agreed upon is binding. If the owner has been disabled for 12 months, there is a good chance that he or she will not be in the same frame of mind as before the disability. The purpose of this agreement is to protect both parties and to leave nothing to chance. The disabled owner gets paid according to the most recent agreed upon valuation within the specific time limit in the agreement. The owner or owners who continue to run the business do not have to work with an owner who cannot contribute to the organization the way he or she previously did. A disabled owner might have different objectives regarding growth and taking risks since he or she can no longer play a role in the success of the business.
My area of expertise is to help get business owners to put their agreements in place and then update the valuation yearly. There are insurance products that can be put in place to fund the buyout after a disability for 12 months.
I will cover off the other three areas of the agreement in my Intentional Success blog next week. Please stay tuned!
Clifford A. Wiegers, CFP, TEP, Ch.F.C., CLU, B.Comm.
Insurance Representative, Wiegers Financial and Insurance Planning Services Ltd.
Financial Planner, Manulife Securities Investment Services Inc.
The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Investment Services Inc.
Mutual funds are offered through Manulife Securities Investment Services Inc. Insurance products and services are offered through Wiegers Financial & Insurance Planning Services Ltd. Banking products and services are offered by referral arrangements through our related company Manulife Bank of Canada.