Funded business succession agreements
A properly funded business succession plan is essential for any business to have in place. Stacks can help ensure your business has the right strategies in place to avoid any difficult situations that may arise when the principal of a business leaves.
When a principal of a business leaves, whether as a result of retirement, new horizons, disagreement, illness or death, there is a real danger period for the business. If the business can’t make the successful transition to a new ownership structure, its viability may be reduced or it may ultimately fail.
Consider this - the principal of an established business dies unexpectedly, leaving behind a wife and children. His interest in the business has been valued at $1,000,000 but although the business is successful, it doesn’t have a lot of cash reserves. The end result is that the business is sued in order to force it to pay to the deceased’s estate, the value of his interest. When it can’t, the business becomes insolvent and the widow ends up having to sell her home, move, and find full-time employment to support her children.
Having a properly funded business succession agreement in place can help a business to avoid such unpleasant and unnecessary outcomes.
A Stacks Law Firm commercial lawyer can provide advice about Funded Business Succession Agreements, discuss your particular estate planning objectives and draft an agreement accordingly. We can help you to ensure that your business has strategies in place to cover different eventualities including those that are planned and those that are unexpected.
What is a Funded Business Succession Agreement?
It is a document that deals with the immediate or future succession of business ownership. An agreement may be between:
- Two or more business principals
- One or more business principals and key staff, family members or any other prospective successors
Business succession agreements generally take two forms:
- Involuntary or unplanned departure agreements such as in the case of death, illness or total and permanent disability to a principal in the business. These agreements are often funded by life insurance products. The agreement is entered into once the life insurance cover is in place. It is important that the ownership of the insurance policies be completely in line with the terms of the funded agreement and with the estate planning objectives of each principal. A meeting between the principals and their business accountant as well as the lawyer drafting the agreement, can be very helpful before entering into the agreement.
- Voluntary departure agreements such as in the case of a business principal retiring.
Types of funded succession agreements
It is a document that deals with the immediate or future succession of business ownership. An agreement may be between:
- Mandatory but Contingent - where the transfer of business equity under the agreement is mandatory but dependent on a 'condition precedent' such as death or a defined health crisis.
- Contingent Option - where both the continuing and exiting principals (and associated proprietors such as the trustees of family trusts) have the power to exercise options to transfer equity in the business if particular events defined in the agreement occur.
- Forfeiture - where an exiting principal forfeits their interest in the business.
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