Let’s say you’re running a cafe with a business partner. What would happen to you – and to the cafe – if your partner was in a serious accident -tomorrow? We’re talking death or permanent disability.
Have a think about that picture.
Now consider if your partner’s partner (their spouse) decides to get involved in the business. You know, to pick up the slack. That’s a person very good a drinking coffee but utterly useless at running or even working in a cafe. Perhaps the spouse wants to sell the business and get their money out, but all of you money is invested in the cafe.
Enter the insurance funded buy-sell agreement
A buy-sell agreement is an agreement between the shareholders (for companies) or unit holders (for unit trusts). For this Small Plate, I’ll talk about companies and shareholders.
Looking at that calamity – say, the death of the person behind the shareholder. The agreement forces (or gives the option to) the other shareholders to buy the shares owned by the person who suffered the calamity.
An insurance funded buy-sell agreement means there’s money paid to the estate of the deceased person to cover all or part of the value of those shares.
That will help avoid the useless spouse getting in the way as they won’t be involved in the company any more. It will keep the business tightly held by those remaining business partners. It can also avoid a massive argument over the value of the business – always a contentious issue.
If you don’t have an insurance funded buy-sell agreement, you probably need one
There are very few instances where hospitality business partners don’t need an insurance funded buy-sell agreement.
The agreements aren’t too difficult to put in place. There’s always a need for careful consideration of:
- what triggers the agreement;
- who’s the insurer;
- who pays for the insurance (e.g. individuals or the company); and
- as usual, tax issues.
If you want to get an insurance funded buy-sell agreement sorted for your hospitality business, get in touch.