Protecting your equity, not just your property

Protecting your business against the unexpected departure of a business partner is one of the most important insurances you may ever need.

Many businesses will insure their premises, equipment, and stock. They will take out worker’s compensation and public liability cover. However, they give no thought to the potentially devastating damage to the business caused by the unplanned exit of a business partner due to death, illness, or injury.

I have seen many a successful business rapidly decline following such a loss. Disputes between the remaining partner(s) and the heirs of the departed partner over the purchase of the latter’s equity in the business can lead to costly legal battles and are a distraction from the operation of the business at a time when it needs close attention. Interference in the running of business by newly inherited spouses and children can cause immense stress to the individuals involved and to the business itself.

This is a very unsettling time for all concerned. What is required is a solution that provides for certainty in three key areas to ensure a smooth transaction for the purchase of the departing shareholder’s equity. These are:

1. Certainty of pricing – removing disagreement over the value of the equity.


2. Certainty of funding – providing funding to pay for the equity.


3. Certainty of timing – defining exactly when the transaction should take place.

The solution is legal contract known as a Buy/Sell Agreement. This is distinct and separate from a Shareholder’s Agreement, which could be described as a Pre-nuptial Agreement, setting out the terms and conditions upon which the business partners will “get married”. Rather, a Buy/Sell Agreement is akin to a Business Will, prescribing what would happen in the event of death, illness, or disablement.

A Buy/Sell Agreement will usually contain a price for the equity in the business, or a formula by which it can be calculated. The funding for the transaction is most often provided by insurance and the timing of the deal is set by defined by trigger points.

Implementing such a strategy is simple and cost-effective if handled by an experienced adviser who can manage the entire process including providing the advice, obtain the insurance, and sourcing the legal agreement, and tying it all together.

Ultimately, it is really an aspect personal estate planning; ensuring that a life’s work building a business is not destroyed by bickering, mismanagement, and uncertainty.