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How robust are the legal agreements inside your business?

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How robust are the legal agreements inside your business?

By Brian Gillatt

Having the experience of consulting with business owners for many years, I have noticed that businesses regularly have gaps in the area of Shareholder and Buy/Sell agreements – in particular when it comes to family businesses and business partnerships between friends.

There are two issues that are most common. Firstly, that agreements do not exist at all, and secondly, the content is not sufficient to deliver the required outcome, that is, protect the interest of the relevant parties.

Don’t stretch the friendship

It is critical that all businesses have accurate and robust legal agreements in place to protect shareholders and the business - in the case of a shareholder suffering a life changing disability or death - it happens more frequently than you think. As history has shown, failure to have a quality set of agreements in place, threatens the financial stability for the remaining shareholders and their families. From an insurance perspective, the purpose of insuring for these events is heavily negated without correct structures in place.

The right insurance gives security

When a situation arises where a shareholder is no longer able to continue in the business due to illness or even death, the raising of capital to purchase their shareholding can be financially out of reach for the remaining business partners. The option of having an insurance policy which is designed to feed money to the correct parties to allow a smooth Buy/Sell process of the shares may be a great solution.

Who are you in business with now?

As a real example, a family had four equal shareholdings in their business. One of the siblings passed away. There was no Buy/Sell clause in the shareholders agreement, so the shares were gifted to the spouse of the deceased via the Will. Raising the $3,000,000 required to purchase the shares from the spouse was not feasible. 

The outcome was that there was now a non-contributing shareholder in the business who was able to demand a shareholder income even though they were inactive in the business. Furthermore, if this shareholder remarries, their new partner will inherit a $1,500,000 share package under legal marriage law where assets are shared 50/50.

It must be remembered in cases such as the above, legal representation is likely to be engaged. Each party will have a legal representative attempting to gain the most advantageous outcome for their respective client. That will lead to high legal costs, distractions from operating the business and a large degree of ill feeling.

Be prepared for the worst

Putting in place a correct and accurate Buy/Sell agreement now could ultimately save hundreds of thousands of dollars, and possibly save the business from failure. A quality agreement and the right insurance will ensure that the shares are retained by the correct parties, and the spouse will receive fair value for the shares that their partner has created after many years building the company.

It is important for all business owners to revise the existence, quality and accuracy of these agreements - it could be the undoing of years of hard work if these structures are not sound.

Note: This article does not constitute legal advice. Please seek legal advice with regard to establishing robust legal agreements for your business.
 

We are here to help

If you would like to discuss further insurance solutions for your business, please contact Brian Gillatt at [email protected].