The Need for a Buy-and-Sell Agreement

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 unknown external investors; and
• The existing owners may not have the funding to repurchase the deceased owner’s interest at that stage.

The alternative to insurance through a buy-and-sell arrangement 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.