Why is business succession important?

According to the Family Business Association, 70% of Australian businesses are family owned. Yet, experts state that only 26% of these survive into the next generation and only 16.5% will survive to the third. The major cause of this astonishing failure to pass on the enterprise of one generation to the next is a lack of business succession planning with a mere 23% of businesses having a documented plan.

Of great concern is the sudden and unexpected death or illness of a partner or key shareholder. Without plans for their interest in the business, disputes arise on issues such as who acquires the interest, the value of the interest and whether the business is to continue. Occasionally the surviving business partners find an uncertain future as they deal with their deceased or incapacitated partner’s spouse or family’s business inexperience or conflicting interests. These issues are best addressed pro-actively with specialist advice and an assortment of legal tools implemented while all the business partners are capable and available to make such decisions.

The Buy/Sell Agreement

Termed by Inc. Magazine as “the next best thing to immortality” a buy/sell agreement is one of the best ways to ensure your family’s financial future is secured and to enable the business to go on without you.

A buy/sell agreement is designed to provide the processes, mechanisms and funding for implementing your business succession plan in the event of the death or disablement of a partner or shareholder.

A buy/sell agreement is a legally binding document that is entered into by partners and shareholders usually in conjunction with them obtaining a life insurance policy paid for by the business. The agreement gives the remaining partners or shareholders the opportunity to acquire the disabled or deceased partner’s or shareholder’s interest in the business and stipulates the method for determining the purchase price – usually equivalent to the proceeds of the life insurance policy. This agreement also ensures the continued operation and control of the business by the partners and shareholders.

You should have a buy/sell agreement if:

  • You are in business with other people
  • You want your family to receive the full value of your share in the business and to be treated fairly if you die or are disabled
  • You want your partners or fellow shareholders to continue operating the business after your death or disability
  • You want to be able to obtain the interest of a disabled or deceased partner or fellow shareholder without hassle
  • You do not want to conduct the business with the involvement of a disabled or deceased partner’s or fellow shareholder’s family
  • You want to ensure that you have the necessary funds to buy the disabled or deceased partner’s or fellow shareholder’s interest in the business

Testamentary Arrangements

Having a Will is another important step in securing the future operation of your business. If you have partners and have a buy/sell agreement, you must ensure that your Will does not contradict such arrangements and that the executor of your estate considers such agreements. You can do this by inserting provisions in your Will. These direct that the agreements are to be honoured by the executor who then manages your affairs accordingly.

If you are not in partnership with anyone and you are a sole trader or single director company, you can also make arrangements in your Will as to what will happen with your business upon your death.

Power of Attorney

A Power of Attorney should also be considered so that someone is able to make decisions on your behalf in the event that you are temporarily unable to make them for yourself. A Power of Attorney operates during the life of the business owner until it is revoked. If an accident, stroke or other disabling event occurs the Power of Attorney will place your decision making power of the business person in the hands of a trusted friend or relative.

The maker of a Power of Attorney can designate the date that it is to take effect and the scope of the powers given to the attorney. A preferential list of several attorneys can be made in case the first choice is unavailable or the option of appointing several attorneys to make decisions together can be arranged.

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business owners should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

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