What Is a Business Will & Why Is It Crucial for a Business Owner?
Most Australians understand the importance of having a will to transfer assets, property, or financial wealth to their loved ones. Having a will creates a clear path as to where your assets are to go when you pass away and reduces the stress on your family at a very difficult and emotional time for them.
However, if you own a business or own a part-share in a business, a ‘business will’ is as equally important as a personal will.
What is a business will?
A business will concerns what will happen to your business in the event that an owner or shareholder dies or becomes incapable of playing a part in the business’s future. It ensures there is a smooth transition of the ownership of the business (or of the now ‘vacant’ shares), and outlines a pathway to succession.
Although most business owners rely heavily on their fellow business partners for their expertise in specific fields, capital or skills, the business doesn’t have to cease if a particular partners dies or becomes incapable.
Of course, the exit of a key partner will pose challenges, and the void will have to be occupied – and if appropriate funds are not available to buy the departed partner’s share in the business, the company’s future outlook could look bleak.
However, a clear and thorough business will, that includes buy-sell insurance and a detailed buy-sell agreement, can steady the ship in turbulent times and can ensure the business continues into the future.
What is buy-sell insurance?
When you begin planning your business will a key question you need to ask is: in the event of a key partner dying or becoming incapable of continuing on in the company, are there funds available to buy his/her share of the business?
If the business cannot pay this lump sum then it is a very good idea to start thinking about buy-sell insurance. Buy-sell insurance will pay the required sum lump should a partner die which can help to ensure that the business continues and that the remaining owners can acquire the ‘vacant’ shares.
What is a buy-sell agreement?
A buy-sell agreement discusses the arrangements as to how remaining owners acquire a departing owner’s share of the business. A buy-sell agreement is typically also included in other legal business documents, such as a shareholders’ agreement, and should be included within any Business Will (also often called a Business Succession Plan).
What should be included in a thorough buy-sell agreement?
The buy-sell agreement sets out the process of acquiring and transferring the shares of a departed owner to the existing owners of a business.
There are many things to include in a buy-sell agreement, such as:
- Discussing a buy/sell options – In the event of death, trauma, serious illness, or other such triggers as outlined in the buy/sell option that causes a key partner to become incapable of playing a part in the business, this discussion outlines the option for existing owners to acquire or dispose of the shares of the existing owner.
- Option time frames – The buy-sell agreement should discuss timeframes with regard to initiating options. For example, if a key partner is subject to a traumatic event, a reasonable timeframe might be discussed to allow that partner to recover and return to the business
- Valuing the business and shares – An agreement regarding how much the business is worth and much each owner’s share is worth should also be outlined in the buy-sell agreement. This should be reviewed regularly in order to ensure the evaluation is correct.
- Buying out a retiring owner – Retirement or resignation of an owner or partner is classed as a ‘voluntary event’, and as such cannot be insured. Therefore the buy-sell agreement should also discuss the produced for buying out a departing owner due to retirement or resignation.
And as with any business document, it is essential you seek professional advice — this is particularly true for buy-sell agreements.
As a business owner, it can be easy to lose yourself in growing a successful company, however, you should consider what would happen to your business should the unthinkable happen. If you employ people to work in your company or if your family depends on your business for a living, consider what would happen to them if you were to depart without a clear business will.