If i buy will you sell

IF I BUY WILL YOU SELL?In thissecond edition of our series on the risks that a business owner may face, we focus on a buy and sell arrangementas an exit strategy where there are two or more partners in a business.BackgroundA business needs to preparefor the event ofone of more of the partners in the business dyingor becomingdisabled. Putting abuy and sell arrangement in place can ensure a smooth transfer of shareholding between partners. This guaranteescontinuity for the business and peace of mind for the deceased or disabled partner and their family.The business entityReplacement of a deceased or disabledpartnerin a business can taketime with sometimesdire consequences on the operational ability of the business. Offering the shares or members’interest to remaining shareholders or members, or even an outside party, has certain legal requirements. A shareholder’s agreementor Memorandum of Incorporation seldom makes provision for all the practical aspects of transferring ownership to new parties. A separate buy and sell agreementis therefore required to ensure that all the necessary requirements and relevant processes are set out meticulously. It is important to note that in terms of the Companies Act, no other agreement may supersedethe shareholder’s agreement or Memorandum of Incorporation. It is therefore necessary to ensure alignment of the buy and sell agreement and Memorandum of Incorporation.Another aspect to consider is whether the deceasedor disabled partner had a loan accountthat the business owes to him or her. The executor of the deceased partner’s estate will call up the loan account whichaffects the value and risk profile of thebusiness. Let’s look at an example:X-success (Pty) Ltd is currently valued at R15000000. There are two loan accounts owing to the two shareholders of R2000000 and R1000000 respectively. The valuation of the business will therefore be as follow:Market valueR15000000Less: Liabilities(loan accounts)R 3000 000Total valueR9000000From the example it is clear that if the loan account is not settled first, the value of the business will be R9000000 as opposed to R15000 000. It is therefore important to make provision for both the loan accounts as well as the full market value of the business in the buy and sell agreement and underlying funding.There is currently a debate about whether the loan account/s should be included in the buy and sell agreement and attached value of the business. It is therefore important to seek professional advicefor each situation to determine what the best structure will be.The partnersThe remaining owners of a business may be faced with some challenges when a co-owner suddenly dies or becomes disabled. These include not having the resourcesto purchase the available shares or having to deal with a surviving spouseor family memberas a new partner. They may also be faced with an executorwho interferes with the business or wants to sell the shares to the highest bidder.The agreementA properly drafted buy and sell agreement will ensure certainty for the business entity as well as the owners of the business. Essentially it will provide –Certaintyon what will happen with a partner’s share in the business should he pass away-Mutual agreementbetween partners about what valuation method will be used to determine the market value of the business-The timeframewithin which transfer must take place-The funding mechanismthat will be used to buy the deceased partner’s shareStructuring theagreement correctly is of utmost importance. Let’s look at some of the important elements of the agreement –1.Parties to the agreementIt is important to ensure that the real owners of the business is party to the agreement. Issues like whether all parties are selling and in the same proportion needs to be decided upfront. Also ensure that where a trustee as representative of a Trust is involved in the agreement, that the necessary resolution and power of attorney has been granted to that trustee.2.SaleThetransaction needs to be set out in clear terms and conditions of who is selling what to whom. It must place an obligation on the seller to sell ownership to a specified buyer who is obligated to buy at an agreed predetermined price.3.Purchase priceThis isoften the most problematic aspect of the sale. Parties need to agree on what valuation method will be used for the business. There are different ways in which to value the business including the Earning / Yield method, Net Asset Value or Price / Earnings value. Unfortunately many times the value of the business is linked to the life insurance policy taken out to buy out the deceased partner’s share. The risk with using this method is that the actual market value of the business at date of death may be substantially different from that of the policy proceeds which will result in

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