Shareholders Equity Extraction Cover (Buy/Sell Cover)
Eight Suppliers - Multiple Options
If your business partner/shareholder, died tomorrow and his/her spouse/partner came to you and gave you the following choices, which one would you take:
- "I don't want to be involved in this business, I don't like you, I don't like the business that you and my spouse/partner operated, I just want the percentage of my shareholding paid to our estate, in cash, within the quickest time frame possible."
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- "As my spouse/ partner has died, you are now in business with me/my children/my solicitor/my accountant etc"
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- "As my spouse/ partner has died, and we are the majority shareholder, I want this business sold!
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‘What happens when a Business Owner Dies or Becomes Disabled?'
Buy out the Deceased/ Disabled Owner's Interest
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Take the Deceased/Disabled Owner's Representatives into the Business as either:
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Sell to the Deceased/Disabled Owner's Representatives
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Take Outsiders into the Business who have purchased the Deceased/Disabled Owner's Interest
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Liquidate the Business or Sell in a Third Party
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The Problems:
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INACTIVE CO-OWNERS
The problems here are:
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This will not be a feasible option unless:
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The problems here are:
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The problems here are:
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• Determining the prices;
• Raising the money;
• Fixing the terms of payment;
• Even if the agreement can be reached on these points, strained negotiations and legal delays may make it difficult to reach a mutually acceptable conclusion;
• Because there may be no other buyers, the remaining owners may feel they are being asked to pay too much while the deceased or disabled owners representatives may feel that they are receiving too little;
• How will the interest be valued for estate duty purposes? Will the remaining owners be prepared to pay an amount equal to estate duty value?
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• Will they support the plans and decisions of the remaining shareholders!
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• Will they want to change dividend policy or existing remunerations levels?
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• What if some are minors represented by a guardian?
ACTIVE CO-OWNERS.
The problems here are:
• Will they be fully qualified to assume their share of the responsibilities? If not, this could be the worst possible outcome.
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• They are qualified to operate the business?
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• The remaining owners are willing to sell and either withdraw from the business or remain as employees.
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Additionally, all the problems in column one will have to be overcome.
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• The same as those listed in column two for both inactive and active co-owners;
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• Outsiders may not be interested, particularly if it is a minority interest.
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• Will the remaining owners and the deceased/disabled owner's representative agree on a value?
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• If the liquidation or sale is delayed, it may not produce sufficient to pay any estate duty liability. This may result in the forced liquidation of assets other than the business interest;
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• Unless the remaining owners and the deceased/disabled owner's representative can agree on some other solutions, this alternative may be forced on them. A business in liquidation or facing a forced sale has a much reduced value to that of a going concern.
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A very simple solution is to put in place a "Shareholder's Buy/Sell Agreement" that has provision to supply funds via an insurance policy to cover the equity held by each shareholder in the company.
Most agreements have provision to sell shareholding while the shareholders are alive and talking to one another, but no provision for a shareholder dying or suffering a trauma event.
If a trauma event covered under the policy happens (normally Death or TPD or Trauma *see seperate note), there is a provison in the "Buy/Sell Agreement" for the value of the equity in the business of the affected shareholder, to be paid to his/her estate in cash from the proceeds of the insurance policy, provided the estate signs over the shares of the affected shareholder to the remaining shareholder(s) in proportion as mutually agreed upon by all parties, while all parties are standing.
* For Trauma the agreement may include an optional trigger so that provision may be made to hold any funds in trust until a decision is made to trigger the agreement to sell shares for cash.
Please tell me more about Shareholders Cover
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