A Buy/Sell arrangement involves the proprietors in a business agreeing to a plan which sets down what they are to do with their respective interests in the business should any one of them die, become disabled or suffer a major trauma.
Essentially, the arrangement provides for the terminating proprietor to sell his or her interest in the business to the continuing proprietors and for the continuing proprietors to purchase from the terminating proprietor his or her interest in the business. The arrangement must also include a means of funding the Buy/Sell obligations of the respective proprietors.
Why is a Partnership arrangement important?
The death, total and permanent disability or major trauma of a proprietor can have a dramatic effect on a business. The following are some of the problems that can occur:
- The estate of the deceased proprietor may make demands on the business for it to be wound up for payment out of his or her interest in the business, for repayment of loan account balances, etc.
- In the case of death, the estate may insist on immediate and direct involvement in the control and operation of the business, but may not have the expertise.
- The continuing proprietors may end up doing 100% of the work but splitting the profits and;
- In the case of death, the estate of the deceased proprietor may be forced by circumstances to sell his or her interest in the business to an outside buyer for an amount lower than its true value.
What is the procedure in setting up a Partnership Protection agreement?
1. The proprietors negotiate to establish the events which will trigger the arrangement, how the interests in the business will be valued and the respective buy and sell obligations of the proprietors (Solicitor/Accountant)
2. Set up a funding plan which will provide the cash to achieve the financial obligations of the proprietors should any of the trigger events occur (Life Insurance Broker).
3. Set up the necessary legal documentation which will set out the terms and conditions of the Buy/Sell arrangement and how it is to be funded (Solicitor).
Which Life Insurance products should be used for Partnership Protection arrangements?
A combination of Life, Trauma & Total & Permanent Disablement Insurance is the easiest way to provide the funding for the proprietors. The sum insured should be as near as possible to the agreed value placed on each proprietor’s interest in the business.