A buy-sell agreement can be thought of as a "business will". It's an agreement between the owners in a business about what will happen if one of them dies or if one is them is unable to work in the business.
Without a buy-sell agreement, difficult situations can become even more difficult. If a business owner dies, the other business owner(s) might find themselves in a situation where they share an interest in their business with the family of their business partner. In most cases, the family would rather be paid out and have nothing to do with the business, which can be a lot easier said than done. Or family members who might not have any idea about the business may want to get involved with its management.
Given the importance of these agreements, it dumbfounds me that so few SMEs have arrangements like this in place.
Insurance advisers talk business succession and buy-sell agreements about this regularly, and I've been asked many times about lawyers and law firms who have special expertise when it comes to buy-sell agreements.
Many people hold themselves out to have expertise in this area but not many people do this on a regular basis. And few people have good insight into each aspect of these arrangements.
Why is this? Why are buy-sell agreements so hard?
I've given this a lot of thought lately. And the more I think about it, the harder it seems.
Here's the challenge. Let's say you have a small business with, say, two to four business owners. They are busy working on their own business. They might have an idea that they should get their business affairs in order, in case something happens to them or one of their business partners. But like many people with wills, it's one of those things that is often on the "to do" list but never gets to the top.
With business succession, this can be even more pronounced because there are so many people involved:
- Multiple business owners, each of whom may have a different interests, different ideas about what they want to happen, and different perceptions and tolerances of/for risk.
- One or more insurance advisers, who may deal with one or more insurance providers in relation to one or more insurance products. (And each individual may have unique underwriting issues resulting from, say, pre-existing health problems which need to be separately addressed).
- One or more lawyers, to review the company documents (including company constitution, partnership and/or shareholder agreements, and existing buy-sell agreements - if these documents exist), and prepare the new documents. Ideally, each party should have independent legal advice to ensure their own interests are protected.
- Accountants, to advise on the best approach from a tax perspective.
- Possibly even a trustee company, who will hold insurance policies and/or funds in trust, to be paid according to the terms of any arrangement negotiated between the business owners.
There may be other stakeholders at the table. For example, equity holders who aren't involved with the day-to-day running of the business. Family members. Employees, some of whom may have options to purchase interests in the business in the future, or an expectation of doing so.
There are so many moving pieces involved, it's easy to see why it doesn't happen more often.
Who coordinates this?
The key question is - who coordinates all of this?
- The business owners aren't likely to coordinate this. Even if they had the time and energy to do it, they probably won't have the inclination.
- Lawyers aren't often engaged because of the percent cost. This is exacerbated when multiple lawyers need to be involved. Many lawyers aren't familiar with the insurance aspects relating to the proposed arrangement.
- Insurance advisers often try to piece this together. This can be challenging for them because they probably won't be remunerated unless and until the deal is done and insurance policies are entered into. If anything falls over, they can find themselves in a situation where they spend a huge amount of time and get nothing. One or more of the business partners may decide near the end to proceed with another insurance adviser. There are also instances where an adviser, no matter how well intentioned, does not have a full understanding of the technical details of what is involved.
- In my experience, accountants might see the value of business succession but do not get directly involved.
Feedback required - have I cracked the buy-sell code?
I've had an insight. My hope is that I've cracked the buy-sell code.
My new business, Fairhaven Wealth, provides insurance advice, but only strategic insurance advice. By that I mean I will recommend types of cover, levels of cover, and product features. I refer clients to other insurance advisers to recommend specific products, in light of underwriting requirements, and to arrange for the insurance.
I also have legal experience. I can't provide legal advice, but I know my way around a buy-sell agreement, as well as a company constitution, and a partnership and/or shareholder agreement.
In short, I can see how all of this fits in. Fairhaven can be the "hub" in the professional wheel.
Here's what I propose:
- I would have the initial conversations with the business partners, and discuss various aspects of what they want. For example, what are trigger events, how to value the business in such an event, who purchases interests in the business and in what proportions, what happens if there is a shortfall in funding or an excess of funding. I will also canvas other succession matters such as wills, enduring power of attorneys, etc.
- I prepare recommendations in relation to types of insurance cover and levels of insurance cover.
- I prepare a buy-sell agreement, based on the conversations. I will not provide legal advice in relation to the buy-sell agreement - I will be merely completing a template based on instructions received.
- I package all of this information to the relevant professional advisers:
- a copy of the buy-sell agreement for all of the lawyers, plus supporting document such as company constitution, partnership and/or shareholder agreement. Also, notes relating to wills and EPAs
- providing scoped instructions to nominated insurance advisers
- a description of what is proposed to the business's accountant, so the accountant can provide tax-related advice
- gaining agreement, if necessary, from an independent trustee to act.
I can work with professionals nominated by the clients. Or I can suggest professionals with experience in these areas for the clients.
For this, I will charge a fee for my independent service. However, by packing the information to all professionals in an easy-to-action manner, it's quite likely I will save money (and that very important resource for business operators - TIME). And it means that an outcome can eventuate.
I'm still thinking this through. I welcome thoughts and feedback from other professionals who work in this space.