Buy and Sell Agreements
A common issue for numerous law firms relates to small to medium size commercial organisations with two to five directors who have difficult issues identifying the owner of their business. Issues continually emerge when one individual dies or perhaps is permanently disabled and the remaining owners are confronted with the truth that they now need to purchase this person’s shares in the business. This can lead to a series of money-related issues for the business and in a few cases can bring about a serious disruption of that business. This article gives some foundation and tips on the best way to secure your business and your own personal interests. In any case, you must talk with your business lawyer for advice and guidance you can apply in your company.
It is common for business mentors and financial advisors to recommend different ideas for succession planning of a business. These ideas are aimed at overcoming the problem when a director wants to retire. Generally though, they focus on the management aspect such as who will replace the out-going person. They do not, nor do they have the skills, to advise on the commercial ownership issues.
These issues are complex from both a legal and a financial point of view. The best way to handle them is via a document called a Buy and Sell Agreement. Most financial advisors and mentors do not have the information of the law and the legal expertise needed to finish a detailed and robust agreement which will stand up to lawful examination if challenged by anyone and bring about a proper Business Succession Plan. For example, what happens to the shares of a director if they retire, become ill or even die? Who takes ownership of those shares and what does it mean for the governance of that company?
By consulting a contract or commercial lawyer on the North Shore, they can draw-up suitable documentation that will permit companies to continue even after the passing or permanent disability of a Director or Shareholder.
This is an idea that is certainly not new but rather is one this is rarely constructed in the right manner. Frequently Buy and Sell Agreements are ineffectively drafted and hardly ever reviewed. There may be an inclination to put something that the Directors quickly concur upon but they will not consider some of the difficult, yet common, issues that can emerge and a few solutions to them.
In general, this is because the individual who is drafting the Agreement only has a little knowledge about possible financial ramifications should a major issue come to play. To be honest, these issues are not matters which the average person takes into account when starting a business yet they can bring about the ultimate downfall of that company if they are not treated correctly from the start.
The circumstances which generally cause the issues which can require purchasing and selling of shares fall into one of the following four conditions:
2. Suffering Total and Permanent Disability
3. Suffering Critical Illness
4. Diagnosed with a Terminal Illness
One solution is to consider different types of insurance which can be drawn upon in the event of any of those circumstances.
The Buy and Sell Agreement is where the shareholders of the business, not forgetting Trustees of Family Trusts, agree to certain actions in the event of any of those or other predetermined circumstances. A good lawyer will advise the steps to take and also include other common situations such as divorce or simply wanting to leave.
One solution is to consider different types of insurance which can be drawn on the occasion of any of those health related circumstances. It is strongly advised that you work with your commercial lawyer and also a business insurance broker. In Albany, Auckland, McVeagh Fleming and Co draw up Buy and Sell Agreements for North Shore businesses. Be sure to check out their website http://www.mcveaghfleming.co.nz/.