Simplistically, a Business Succession agreement (often referred to as a 'Buy/Sell' agreement) is an agreement under which the partners of a business contract to buy the interest of another partner in the event of death (or TPD/Trauma if included).
However, a well-constructed Succession Plan not only addresses equity succession issues, it ensures the business has all the resources needed to continue after a partner suffers an unforeseen tragedy.
It will determine the businesses' fate, in the event of the demise of a Partner, and ensure the funding mechanism is in place to see that the deceased's estate receives full value, without undue delay. It therefore follows that the remaining partner/s can assume full control and management of the business with a minimum of strain or concern from outside parties, such as creditors and customers.
In essence there are five distinct steps that need to be addressed:
1. GETTING VISION RIGHT – PART OF A STRATEGIC PLAN
All principals and their spouses need to sign off that the vision is to ensure that the business continues to succeed the day after someone suffers a tragedy. This process is part of a strategic plan and should identify threats to the business from both within and external to the business.
There will be a need to consider the bank's and creditor's perception on the ability of the business to continue the day after a tragedy and what effect the substitution of a legal representative on behalf of the estate may have on your business.
2. THE EVENTS
It is important to deal with all three classes of tragedies - Death, TPD and Critical Illness.
3. IDENTIFY THE ASSET
Consideration should be given to all business structures and asset classes such as shares, debtors, WIP, goodwill, plant and equipment. You should also give consideration to any assets held outside of the business structure that may impact on the business' ability to continue to trade i.e. business premises.
4. VALUING THE ASSETS
A value or methodology must be struck between all parties so that all principals are 'hand-cuffed' to the agreement. Each class of asset should be treated in this manner. Purchase price should be gross market value less the debt that remains behind.
In this regard we need to identify the debt and its security. Invariably a debt reduction or security replacement strategy needs to be implemented. Consideration should be given to guarantees and lease commitments.
5. FUNDING THE SUCCESSION PLAN
There are six identifiable methods of funding: 1, write a cheque; 2, borrow from the bank; 3, sinking funds; 4, vendor terms; 5, insurance; or 6, combination.
The question that needs to be asked when considering the above funding methods is: "can the business continue in at least its present form if any one of these methods are used?"
The agreement should also nominate contingency plan should shortfalls of insurance to purchase price funding occur. This is particularly a problem if one party is not insurable due to health or occupation.