The Need:
When a co-owner in a business dies, the affected owner’s estate can be left severely exposed, but the remaining owners could also face potential problems. The potential challenges created for the deceased owner’s estate:
- The remaining owners might not have the resources to purchase the shares from the estate;
- The spouse may not want to participate in the business which means that he/she is left at the mercy of the existing owners;
- The deceased owner may have had unique skills that he/she brought to the business, meaning that the risk in the business increases if those skills are no longer available to the business;
- The deceased owner may have earned a salary in the business, and when he/she dies the spouse cannot simply claim that salary unless he/she actually works in the business on the same basis as the deceased owner. The potential challenges created for the remaining owners
- The executor of the estate of the deceased owner might interfere in a business about which he/she knows nothing;
- He/she might want to sell the owner’s interest to the highest bidder, opening up the business to foreign investors; and
- The existing owners may not have the funding to repurchase the deceased owner’s interest at that stage.
The alternative to insurance is to borrow, from a commercial bank, the money needed to buy the deceased owner’s share. However, even if the business is successful in obtaining such a loan, the terms and repayment period could possibly make it unaffordable from a cash-flow point of view. In most cases, insurance would therefore be the more affordable solution.
The Buy-and-Sell Solution:
The primary purpose of a buy-and-sell arrangement is to provide the surviving partner(s) with cash to purchase the interest of a deceased or disabled partner. A buy-and-sell solution provides a smooth exit for a partner in the event of death or disability. This agreement ensures continuity of business in the event of the death or disability of an owner.
Source: Sanlam https://www.123ob.co.za/memberzone/businessbriefcase/documents/buyandsell/whybuysellinsurance/BS%20flash%20fact%20(E).pdf
FSB licence no: 22205