Careful planning is necessary to ensure that a business continues uninterrupted by an owner’s death or disability and that his or her heirs receive fair value for the business.
Paper trail
In many small to medium sized businesses, the arrangements between owners following the death or disability of one of them are seldom committed to paper. Partners (or co-shareholders) tend to work on trust and when one dies without there being a written agreement, disputes may arise.
The death or disability of a business partner may have disastrous consequences for the business, the remaining owners and the family of the deceased or disabled owner. These include:
• Replacement of a partner (including a co-shareholder in the case of a company) or sole proprietor by an heir who may not be qualified to run the business
• The surviving co-owners may be unable to purchase the deceased owner’s share, resulting in the sale of the deceased’s interest to an outside party

• Possible disagreement between the surviving co-owners and the heirs of the deceased regarding the valuation of the business
• Loss of business opportunities and client confidence due to the uncertainty of the continuation of business
Buy-and-Sell
The surviving co-owners may have to raise finance to repay the deceased owner’s credit loan account to his estate.
The credit rating and credit facilities of the business may be adversely affected.
The fairest and most effective means of buying the interest of a deceased or disabled business owner is by providing in advance for such a contingency through a Buy-and-Sell Arrangement. Funded by a life assurance policy, the ability to finance such an agreement is assured, regardless of the timing of such an unfortunate event. The arrangement should be recorded in an agreement, commonly known as a Buy-and-Sell Agreement.
The benefits of a Buy-and-Sell Arrangement are:
• Ensures that in the event of the death of

a business owner, the surviving owners have the funds to retain control of the business
• Provides for business continuity
• Ensures a fair and predetermined price for the heirs of the deceased owner or sole proprietor
• Preserves the goodwill and strength-ens the creditworthiness of the business
• Defines the method valuing interests and specifying co-owners’ rights
• Provides finance for the surviving owners to buy the loan account from the deceased owner’s estate
• Policy proceeds on the death of the life assured are free of estate duty (provided certain legal requirements are met). In that way there is no duty

on the proceeds of the insurance, failing which the deceased owner’s estate could effectively be taxed twice, on both the business interest and the policy proceeds.

It is important to seek professional advice in structuring the Buy-and-Sell arrangement to ensure it suits the specific needs of a business. The structure should then be reviewed regularly and the valuations and insurance policies updated. This will ensure not only that a business owner’s heirs receive the full value of the business assets, but also that they are not involved in disputes, confusion and resentment when the business owner is no longer there.