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Business buy-and-sell: What happens when a business partner dies?

May 18 2015 16:54

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Patrick writes:

I co-owned a successful Gauteng business with my partner Sam, importing, manufacturing and retailing automotive parts. Our partnership strengthened over many years based on the special skills that each of us brought to our business.

Sam had oversight of the supply chain, project-managing new wholesale agreements and sourcing and negotiating product, while I was responsible for staff, marketing and the company finances. With many long hours, the business grew from strength to strength – until disaster struck.

Sam was killed in a car accident after returning from a trip to secure stock from Chinese suppliers. We had discussed the implications of a partner’s death on the firm, but had dismissed the risk on the assumption that his or my wife would step in to fill any void.

Executing the estate

But Sam’s wife was not interested in getting involved in our business, insisting instead that the executor of her husband’s estate sell his share. The executor accepted the most convenient cash offer and I was suddenly lumbered with a new partner who was neither as skilled as his predecessor nor an appropriate fit for our business.

My new partner could not handle the operational aspects of the business and I had no choice but to appoint an additional senior manager. As this additional overhead ate into business profits, I eventually gave up my share to the new owner at a fraction of its previous value.

I would like to know how I could have covered myself from this regrettable outcome.

Buy-and-sell agreements

Jannie Rossouw, Head of Sanlam Business Market, responds:

This unfortunate situation plays out time and again in businesses around the world. The death of an active co-owner or partner places untold strain on both the business and the surviving partners with dire consequences.

Business owners must be prepared for any eventuality that might affect their businesses, including the sudden departure of a business partner. Disaster can be avoided if business partners have an up-to-date buy-and-sell arrangement in place.

Deceased shares and life insurance

A buy-and-sell arrangement consists of two parts. First, a buy-and-sell agreement which is a written agreement entered into between the partners compelling the surviving partner to purchase the deceased partner’s shares from the estate and compelling the executor to sell. The second part is a set of insurance policies over the co-owners’ lives, usually equivalent to the market value of their respective share in the business.

An up to date buy-and-sell arrangement could have saved Patrick and Sam’s business. Upon Sam’s death, Patrick would have received a pay-out from the insurance policy on  Sam's life. He would have used this money to enforce the buy-and-sell agreement by purchasing Sam’s share of the business, which the executor would have been compelled to sell to him.

Choosing your future

A buy-and-sell arrangement enables the remaining owners of a business to choose who their future business partners will be, while protecting the businesses’ profitability and continuity. It also gives the family of the deceased partner the assurance that they will receive a market related price for the deceased partner’s share of the business.

Sanlam urges all business owners to ensure that such structures are in place by consulting with their Sanlam adviser or an accredited broker.

Patrick’s story is one of five scenarios, brought to you by Sanlam Business Market. Still to come:

•    Retirement Provision: for business owners and their employees
•    Surety Cover: signed by business owners for business debt
•    Income Protection: protecting the income earning ability of business owners
•    Savings and Investments: meeting the return and liquidity requirements of business owners

sanlam  |  death
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