Irish Bentley Lawyers - N E W S
September 2008
Buy-Sell Agreements (Business Wills) - 1 September 2008
July 2008
New Taxation Rates - Which apply to me? - July 2008
Buy-Sell Agreements (Business Wills)
What are they and how will they protect me?
A “buy/sell” agreement is a business succession plan for your business (also known as Business Wills). They are crucial protection against some of the things that lead to small and medium business failure. You, your family, staff, suppliers, customers and other stakeholders are all going to be in a more secure place as soon as the agreement is established and the funding is secured through an insurance policy.
Business Wills protect the business against the loss of key shareholders or owners. If a key person dies, retires, becomes totally or permanently incapacitated, effected by trauma or becomes critically ill, then the outgoing owner (or their estate) will be fairly compensated for the transfer of their rights to the business.
Basically, the Business Will is an insurance policy for a key person’s share in a business so that if that key person is no longer involved, then his/her shareholding is transferred in exchange for an agreed value of that share. The agreed value is covered by an insurance policy.
A Business Will is crucial because:
- If you or one of the owners were to die, any charges or loans your business has may be immediately callable by the lender. A business succession plan will ensure that debt can be retired by the continuing owners;
- It should prevent a deceased owner’s spouse or estate from selling their share of the business to a third party that may be unsatisfactory or unknown to the continuing owners;
- It should avoid the possibility of a deceased owner’s spouse or child deciding against the wishes of continuing owners by becoming an active hand-on partner rather than taking the pay-out;
- Each owner knows in advance how the business will be valued and what their respective share will be. This should result in less risk of a former owner, or their spouse or estate taking legal action over a valuation or pay-out figure;
- It ensures the control of the business or its assets are not frozen due to legal difficulties created by the former owner, or their spouse or estate;
- It ensures that the deceased owner’s spouse or family does not take their legal right to claim a share of the business profits without having to work the business; and
- It will provide security for investors, shareholders, directors, staff and creditors.
Planning ahead for when you or another owner leaves your business is extremely important for you and the business. It allows for a smooth transition by ensuring that there are adequate funds to fund the buy out of your share (or a key person’s share).
The Process – What is involved?
The process should be completed in approximately twelve weeks. You will need to allow around six contact hours over that period. Delays can occur when a business does not have its records and accounts up to date, when the partners are not available to meet with their advisors, or are not fully agreed that this agreement is needed. In order to expedite the process it will be beneficial to have all records and accounts up to date and available.
Here is an idea of the process involved, and the different responsibilities of your solicitor, accountant and risk advisor, each of whom has a specialised part to play.
What happens | Who does the work | How long will it take it take? |
| Decision to proceed: have a reasonable estimate of the budget for this project and agreement that the value outweighs the cost. (Hint – include spouses and partners in these discussions.) | Conduct an initial meeting with Irish Bentley Lawyers and the Risk Advisor to get an idea of the costs and define the risks you want to manage. | Up to you. |
| Initial meeting with the solicitor | Meet with Irish Bentley Lawyers to decide the nature of the agreement, the ownership of the policies, the “trigger” events that will determine when the buying and selling happens etc. | Allow an hour for this meeting |
| Data Collection This process requires the collection of business details, and a questionnaire to be completed by each partner. | The Risk Advisor will work with you to complete this process. | Allow a week for this process. Hold ups occur when clients cannot find time for meetings. Your Risk Advisor will need about a half hour to collect data on the business, and up to an hour with each of you to collect personal data. |
Valuation How much the business is worth determines the dollar figure that will be needed for a buy/sell arrangement. | Future Profit CPA or your accountant will provide you with advice. He/she may recommend that you employ a valuer. (You will need to make annual renewals of the valuation so we need to understand the basis for these at the outset.) | This can be one of the “choke points” in the process, particularly if a professional valuer is needed. |
| Tax Advice There are tax ramifications when a buy sell agreement is “triggered”. We need to know what these are so there are no unforseen ATO costs at the time the money is most needed. | Future Profit CPA or your own accountant.(Written advice is needed.) | This can sometimes be achieved by a phone interview. Hold ups occur when clients don’t send documents to the accountant promptly. Allow three days from when you meet with an accountant. If you are using another accountant – check what the time frame and costs will be. |
| Funding (Insurance) Recommendations We can ensure you have a workable buy/sell agreement AND a long term personal insurance strategy for each of the stakeholders. | The Risk Advisor will work with several insurance companies to negotiate the most appropriate cover for you. (You will receive a Statement of Advice that explains in detail the strategies recommended.) | Allow a week or longer for this step, depending on how many lives we need to insure. |
| Draft Agreement | Irish Bentley Lawyers will prepare a draft buy sell agreement. | Allow a week |
| Insurance Applications | The Risk Advisor will work with you to complete the applications. | Each partner/principal will need about an hour with the Risk Advisor to complete documentation. |
Underwriting This is where the insurance company makes its decision whether to accept your risk and what they will charge to carry it for you. | The underwriting department of the insurer will be doing the work. The risk advisor will keep you up to date with developments. | Allow three to four weeks for this process. |
| Preparation of final agreement | Irish Bentley Lawyers now have all they need to prepare the final form of the agreement. | By now there should be no delays. Allow up to a week for everything to be finalised. |
| Implementation Meet at the solicitor to sign the final documents and implement the agreement | It’s time for someone to bring a bottle of wine and some food. You have taken a great step forward in the security of your business and it is time to celebrate |
How much will it cost? (These are indicative prices only. You should negotiate firmer figures before proceeding. Prices are current as at August 2008.)
- Allow approximately $750.00 for the FutureProfit CPA accountant (tax advice only) – Or an alternate amount for the accountant of your choice
- Allow $1500 for Irish Bentley Lawyers (purely for the buy/sell agreement. Any other work such as updating wills will cost more)
- The Risk Advisor will work under a service agreement. The initial meeting is cost and obligation free. If work is carried out beyond that meeting and you decide not to proceed, you will pay $1000.00. If you proceed, this charge will not be invoiced. (The insurance companies pay him/her to manage your affairs.)
- The valuation costs are an unknown. If your accountant can do the valuation, this is quite inexpensive, and may even be included in the cost of the tax advice. If a professional valuation firm is employed substantial costs may apply.
- The insurance costs will differ depending on your health, age, the amount of cover you need etc. There are a number of strategies to work out how these will be paid. Sorting that out is part of the process.
