Why You Need a Small Business Buy Sell Agreement

Risk Management

Most people do not really understand what a small business buy sell agreement is.

A simple question. - Do you want to retain control of your small business in the event that an existing business partner dies or are no longer in a position to fulfill their position – e.g. disability?

Let’s take an example. Peter and Paul have been in business as business partners for the last 5 years. The business they started has been hard work but the business has been profitable and is worth about $500,000 on 1 January 2013.

On 1 January 2013, Peter suddenly dies. As work was split equally between the two, Paul is now under extreme pressure and deadlines are missed and some work is lost. Paul has had to employ new staff, supervise them and train them. This has resulted in profits falling and cash flow to become tight. The business is now worth about $400,000.

The executors of Peter’s estate inform Paul that as at 1 January the business was worth $500,000 and they would like Paul to pay Peter’s estate $250,000 (50% of $500,000 being Peter’s share of the business). Paul does not have $250,000 to purchase 50% of the business and is unable to pay Peter’s estate. Remember the business is now only worth $400,000.

Peter’s executors have two options:

1. They sell Peter’s 50% to anyone who is willing to buy his share in the business. This is not good for Paul as he now has a new partner – someone he does not know and may not like.

2. Peter’s executor’s decide that his spouse will become Paul’s new business partner. This may not be good for Paul as Peter’s spouse may not know much about the business and may have different ideas on how it should be run.

A small business buy sell agreement can solve this problem.

A Buy and Sell Agreement creates clearly enforceable legal rights and obligations that are binding on both parties should an event as above occur.

How does it work?

Paul & Peter undertake to maintain personal income protection and life insurance policies for their key person. This can be paid by the business.

When Peter or Paul retires, dies, or suffers a disability illness that renders them unable to fulfill their position the surviving party will have the option to purchase the exiting party’s share in the company using the proceeds of the insurance monies received.

Do I/we need it?

Small business buy sell agreements simplify the task of deciding who will run the company when one party is no longer able to. It minimises unwanted involvement in the company from third parties (spouse of the survivor or an unwanted partner). The Agreement also provides the surviving party with funds to retain control of the company.

We would recommend a Buy and Sale agreement in any situation where there are two unconnected business partners.

Losing a business partner is a very stressful time for any business. For the surviving business partner finding capital will add to the stress levels.

All circumstances are different so you should speak to your advisor before you take any action.

Hitesh Mohanlal

Director at WOW! Advisors & Business Accountants

14 years ago I lost a family member aged 38. I realised then there were important things in life than business and money. This tragic event drives everything I do. I am the founder of WOW! Advisors & Business Accountants, MediSuccess and CrystalClear Bookkeeping. I authored Double Your Profits and Halve Your Working Hours for Medical Practitioners.' I am Australia's leading Strategist & Business Adviser with a passion to bring smiles to the faces of medical professionals. As a result of the work I have done & based on my approach I has been recognised on Fox, NBC, CBS and ABC. Most business owners work long hours & recent surveys show that work life balance, income and wealth creation is the major area of concern. My ethos is to work with business owners improving their accounting and taxes but particularly to improve profits/ personal income and wealth whilst cutting working hours in half so that they can enjoy an awesome lifestyle with plenty of time for family, fun and philanthropy. I specialise in the medical sector. I have worked with over 3,500 businesses in Australia, America, UK, Japan and Europe. I soon realised that over 78% of business owners: - Found understanding figures too hard. - Were never taught how to run a business. - Spent money on areas they did not need to. - Paid more tax than they needed to. So we design strategies to specifically deal with the above but also: - Move business owners from being a business operator to a business owner so the business can run on its own. - Create investments, assets and wealth which generate income so that if you are unable to work or retire income is still generated. I am so passionate about saving tax and improving profit that since March 2019 for every $100 we save/ make for clients I am committed to make 20 impact across the world. Currently over 1,000,000 impacts have been made.