Business Succession Planning
Nobody likes to think about it, but it's inevitable that one day you'll leave your business. Whether you decide to sell up, retire or leave due to health reasons, it's important that you plan for that day. A succession (or exit) plan outlines who will take over your business (or your share of the business) when you leave.
A good succession plan will help your business transition smoothly to the new owner. By planning your exit early, you can maximise the value of your business and help it to meet future needs.
Make sure your succession plan is achievable. Set a realistic timetable and measurable milestones along the way and stick to them.
One of the key legal documents required in any business succession plan is a carefully drafted Shareholders Agreement (sometimes referred to as a Buy/Sell Agreement).
Shareholders Agreement / Buy-Sell Agreement
A buy-sell agreement is an arrangement or contract between business partners and/or shareholders, unitholders or trust beneficiaries in a business that specifies:
- how the key decision making functions of the business are to be made;
- how certain ownership or voting rights are to be exercised; and
- how ownership interests are to be transferred between the various owners of the business.
- Buy-sell agreements are also about planning for the possibility of conflicts or difference of opinion between business partners and to enable stakeholders to agree in advance how these situations will be handled. They are complex documents requiring specialist legal and tax advice.
In general, the agreements focus on shareholders’ rights to transfer shares (or ownership interests) in the business to other people, circumstances that activate those rights, and transfer mechanism procedures.
Specifically, these agreements entitle shareholders to buy each other out under certain conditions and at a certain price, and to have first right of refusal when someone decides to dispose of shares.
Buy-sell agreements can restrict who may become a new owner or part owner of the business and may also specify that interests are not to be sold to anyone outside the identified group (spouse, child, grandchild, or trusts established for them or the company itself) without prior approval of the remaining shareholders. Those persons acquiring shares (or other beneficial interests) are also required to agree to be bound by the shareholders agreement going forward.
Distinctions can also be made between mandatory and voluntary buy-sell shareholder (beneficiaries) agreements.
Mandatory agreements oblige shareholders (or their estates) to sell shares in a business to the remaining shareholders or stakeholders upon the occurrence of a triggering event such as death, disability, resignation, retirement, attainment of a certain age or divorce. This obligation is drafted in the form of enforceable put and call options vested in the relevant parties.
In contrast, voluntary buy-sell agreements restrict persons to whom shares can be sold, willed or gifted. This is usually drafted in the form of 'pre-emptive rights', whereby the outgoing business partner or shareholder must first offer to sell their shares to the remaining partners/shareholders prior to being able to sell their interest to a third party.
Buy-sell agreements also provide a method for pricing shares to be sold (usually arrived at in consultation with a valuation from an independent expert).
The means of payment of shares of the outgoing partner can also be specified, which may in some instances, be funded by life, disability and/or key man insurance, covering either part or all of the purchase price.