When we ask business owners how often they review their shareholder or buy sell agreement the response is often “I should look at it more often. We set one up when we set up the business 10 years ago and bought some term insurance. I think we are okay but maybe I’ll have my accountant and lawyer look at it sometime."
Let’s face it, business owners spend most of their time building their business. Things like reviewing boring partnership agreements and business succession planning takes them away from their baby. I can’t count the number of times I have heard “I’ll get around to it, but not now, I’m too busy."
Well, sometimes the unexpected happens and the business goes from being viable to being under unimaginable financial duress, all because someone “didn’t get around to it." I will be writing a real life case study on this.
So here are 5 reasons why business owners and their professional advisers should review partnership agreements.
1. Does the agreement address what happens at disability or diagnosis of a critical illness, marriage breakdown or bankruptcy? Often agreements only address the death of a shareholder.
2. Is the company or are other shareholders obligated to buy back the shares upon a death or a prolonged disability? Careful wording needed here!
3. Don’t forget share values probably increase over time. Regular updating of the supporting insurance coverage is crucial.
4. Does the ownership of the insurance reflect the wording of the partnership agreement? For example, is the insurance owned by the company or individual shareholders as the agreement requires?
5. Is the agreement clear as to how the credit to the life insurance Capital Dividend Account will be used in the event of a shareholder’s death? This is often left out of agreements. Failure to properly update and fund partnership agreements can result in unnecessary financial and emotional stress.