In business as in life what happens is not always what you expect, it pays to have a plan B
Life just isn’t coming together at the moment (certainly in the imaginary world I’m existing in as I write this article). For starters I had a significant heart attack just over two months ago. I was in a coma for almost a week. I’m going to need surgery but I need to regain my strength first. Then there is the recovery period. I’m told that it could be close to 6 months before I am back at work full time. That is where my problem arises.
My business partner doesn’t seem keen to wait for my return. We had insurance covers on each other should this issue arise. Unfortunately we don’t seem to have completed the paperwork as well as we might. The insurance on my health was owned by him and he has now received the money – in his own name. Thanks very much he said. And by the way “I would like to own the whole business. There is too much uncertainty around your return date and if it is six months then why should I carry the pressure for that long. Sorry mate, but we need to move on”. But my business is a big part of my life. I don’t want to sell.
My make-believe business owner’s situation is unfortunate. In my own business that problem is not going to arise. For starters we considered the possibility that the owners of the policy proceeds are not bound to use them to purchase the shares of the business and that the funds could be applied to a purpose other than that which was intended. So the insurance proceeds will be received by an independent entity.
And we have signed off a Buy Sell Agreement. This is a legal document which specifies how and under what conditions a shareholder will be required to transfer their shares and the process for doing so.
In the event of my death the transfer to the other business owners is automatic – they won’t end up doing business, or negotiating, with my wife or my solicitor. If I am disabled I get 12 months to get myself back to work. That is a period agreed by all the parties and the cash will be created through insurance to keep the business trading. The risk that we might recover but find that our ownership in the business has gone led us all to see 12 months as a fair outcome.
We have documented a valuation formula for the shares. I don’t want to be negotiating from my sick bed. The agreement specifies that my salary will continue for 3 months. My current account will be repaid after 12 months. I am only entitled to drawings in the interim if the bank balance is at a pre-set level. To the extent that the insurance proceeds have been received I can choose to trigger the buy sell agreement and sell my shares prior to the 12 month deadline if I want.
If there is insufficient insurance funding to buy my shares when the time comes then the agreement allows for the balance to be paid in three equal annual instalments. Interest will be paid on the outstanding amount at the prevailing ASB three month term deposit rate. If there is a surplus then it is to be distributed to shareholders in proportion to their shareholding. The remaining shareholders are required to indemnify me from the date of sale in regard to obligations to which I am a party.
Certainly of outcome is important, particularly at a time of ill health. A Buy Sell Agreement and an independent entity to hold the insurance proceeds are crucial to that.
By Stephen McFarlane