People who own a business often do not have a lot of disposable income as most of their income is tied up in their business. This is not a problem, until one of the business owners passes away. At this point, the rest of the shareholders in the business will need to pay out the portion owned by the deceased. The valuation of the company is taken into account as well as the deceased shareholding, this could be a substantial amount of money. Money that the remaining shareholders probably do not readily have. Buy and sell assurance would help in this scenario. It enables the existing shareholders to buy the portion from the deceased at fair value.
For example, Johnny owns a company with Sipho and Vikraim. Johnny owns forty percent of the shares of their company that is valued at R10 million. When Johnny passes away, Sipho and Vikraim will need to pay Johnny’s widow for his portion of the business, R4 million. With buy and sell assurance in place, they are able to buy Johnny’s shares. This is made possible because of the life insurance on Johnny’s life as well as a written agreement between the three business partners. If they didn’t have a buy and sell agreement then they would have to find a way to raise the money another way. If they were unsuccessful in doing this then the executor of Johnny’s estate would look for anyone who is able to buy these shares. The consequence is that Sipho and Vikraim could end up with a complete stranger as new shareholder who owns 40% of their company.
If this assurance was not correctly set out and agreed upon from the beginning, it could become a problem later on. The structure includes the right level of cover for each shareholder based on their shareholding in the business, it also ensures that each party is happy with the arrangement. For this reason it is vital to seek the help of a qualified financial planner when setting out these agreements.