With Guest Blogger Kim Ariagno
Business owners in Canada know they need to plan for the day they retire, sell their business or pass away, but the majority haven’t taken any steps towards that goal. As owners you spend most if not all your time running the business. Part of running a business includes protecting yourself from life events.
What if your business partner died? Who would inherit their part of the business? It won’t automatically go to you. Will it go to their spouse or children? Losing a business partner can seriously leave a financial burden on the company. It can have a negative impact on the running the day to day. With one partner gone it may also have an impact on your banking arrangements. The bank may find it enough risk and could freeze your lines of credit or call outstanding loans.
In our personal lives, we usually leave everything to the surviving spouse. If you don’t have your business set up properly, they will become the new shareholder. Can they run the business, will they leave their job to take on the partnership? Do you even want to work with them?
A buy/sell agreement is a great solution and can be used for death, disability or retirement. You need to work with a qualified lawyer to ensure you fully understand the agreement. Within the agreement you would create a valuation formula, thus avoiding any arguments on price. You would also include things such as having first right of refusal for purchasing the shares from the family or that the family must sell the shares to the surviving partner. There are many ways to structure a buy/sell agreement and you should speak with a lawyer and an accountant to ensure it is done properly.
Now that you know what agreement you need, how will you fund it? Life and disability policies are a great way to ensure you can purchase the deceased or disabled partner’s shares. Without this in place you would need to use your personal assets or use the assets of the business. These options may not be available. You need to work with a team of professionals to protect your business. Contact an insurance advisor for more information on funding buy/sell agreements.
Stay tuned for future blogs where we will discuss more options to protect your business. How does the business keep running if you become ill? What if a key employee dies or is ill? Where will the money come from to pay for payroll and other bills? Ask yourself these questions before you really need an answer.
For more information, please visit Kim’s Financial Health Clinic blog!