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Business Continuity (Buy-and-Sell)

Most people spend a great deal of time and effort planning, establishing and operating their biggest asset, a business. Many entrepreneurs also consider it to be the source of their retirement capital, as well as income for their families when they are no longer able to run the business. The need: Unfortunately, experience has shown that only a limited number of business owners take the time to consider the practical consequences of an unexpected death or disability. How long would it take to find a willing buyer for your business? Would their family receive a market-related price for their business interests? What would be the impact on staff and creditors and how would this affect the continued existence of the business? The solution is a business continuity plan, also known as a buy-and-sell agreement. The solution The business owner finds someone who understands his business and would be interested in taking over ownership. He then concludes an agreement with the buyer(s) in terms of which the owner’s interest in the business will be sold to the buyer(s) in the event of the owner’s death or permanent disability. It is thus possible for sole proprietors or sole-owners to also enter into such an agreement to sell their business. Examples of potential buyers are current co-owners, staff members, competitors or, in the case of a company or close corporation, the corporate entity itself. The business owner could enter into such a contract by verbal agreement, but because the existence of an agreement might be difficult to prove later, it is recommended that the contract should be in writing wherever possible. This is a contract of sale and purchase and, as such, must contain certain essential terms and conditions. These are: the full details of the seller, the full details of the buyer, a description of the item(s) to be sold and bought, the price of the business interest and how it will be financed, and the circumstances under which the contract can be executed. It is essential that the seller and buyer agree on the value of the business interest otherwise no contract can come into being. The starting point should be to determine how much a willing buyer would be prepared to pay, and how much a willing seller would be prepared to accept for the business. It is recommended that the parties decide upfront on the valuation ethodology to be used, in order to avoid disputes in the future. The agreed valuation method can then be incorporated into the contract. A experienced financial planner will help you determine the value of your business. This valuation method is then used to determine the purchase price at the inception of the contract. The next step is to determine how the purchase price will be funded. The buyer may attempt to build up sufficient capital by way of investments, but this is a risky option because one does not know when death or disability might occur. Life assurance offers a cost-effective and practical solution to this problem. The buyer should take out insurance on the life of the seller in order to receive sufficient capital to cover the full purchase price. While a new insurance policy is preferable in order to avoid adverse estate duty and capital gains tax consequences, the client may always choose to use an existing policy if his/her application for a new policy is likely to be declined due to poor health or old age. The benefits This agreement provides business owners with a plan that would enable the business to continue operating if one of the owners/co-owners were to die or become permanently disabled. Without it the following problems may arise: potential buyers of the business interest may not be readily found, family members of the seller may become entitled to a share in the business by way of inheritance and may have no interest in, or knowledge of the business, the business interest may be sold for an amount that is below fair market value, thus jeopardising the effectiveness of the seller’s estate planning, it may adversely affect the relationship with creditors and banks and they could call in their facilities, large capital sums will be needed to fund the purchase of a deceased or disabled co-owner’s interest at a time when the buyer(s) is/are unable to raise sufficient funds, and quality staff members would not be attracted to the business and existing employees would be uncertain of their future and might resign.
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Buy-and-Sell Insurance (Business Continuity) Buy-and-Sell Insurance (Business Continuity)

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