Entrepreneurship is both an exciting and difficult journey from the startup days to the first major accomplishments. Amidst the everyday hustle and bustle, many business owners find it difficult to look ahead far enough to ensure a good business succession planning. Yet it is crucial for ensuring the smooth transition and operation of the business in the event of the death, retirement or departure of one of the business owners.
In this light, below is a guide on the Buy-Sell Agreement in Singapore, and how it can help your business and your succession planning endeavours.
What is a Buy-Sell Agreement?
A Buy-Sell Agreement refers to the terms and conditions pertaining to a business in the event of death, disability, retirement or departure of the business owner from the business.
It aims to ensure that there is business continuity and that the partners or shareholders are able to distribute the business shares. The Buy-Sell Agreement helps the business owner control who can buy into the business, and envision the potential scenarios for business succession planning.
The other reasons for having a Buy-Sell Agreement include preventing business uncertainty, avoiding liquidity problems, and retaining customers through a smooth business transition. Given all these reasons, a properly documented Buy-Sell Agreement offers a number of benefits which outweigh the cost of preparing such agreement.
When should the Buy-Sell Agreement be Created?
While many business owners do not usually plan ahead to have a Buy-Sell Agreement, this should be crafted as early as possible to ensure that the stakeholders agree on the main aspects business operation to ensure that any unforeseen circumstances have minimal effect on the business. If the Buy-Sell Agreement is being prepared when a business owner has already exited the business or is about to do so, it will be more difficult to get all stakeholders reach an agreement on all the terms and conditions related to the business.
Another reason to prepare the Buy-Sell Agreement early is to minimise the emotional impact associated with a shareholder’s exit. For family businesses with a number of owners, a Buy-Sell Agreement will minimise the likelihood of future family disputes.
What are the types of Buy-Sell Agreements?
One form of the Buy-Sell Agreement can be a cross-purchase agreement whereby the owner, who is leaving, sells his shares directly to the other remaining owners. This kind of agreement works best for small companies with a relatively small number of shareholders.
Another form of the Buy-Sell Agreement is the stock redemption or entity-purchase agreement. In this type of agreement, the business itself buys back the shares of the departing owner. At times, a Buy-Sell Agreement can also be a hybrid agreement, whereby there is a combination of the elements from both the cross-purchase agreement and the entity-purchase agreement.
What must be included in a Buy-Sell Agreement?
A Buy-Sell Agreement should include a business valuation clause, that is, to have an expert gauge the value of the business and an overall asset value. This will help the owner estimate the business’ wealth avoiding any possible mistakes.
The agreement should specify whether a departing owner’s shares can be purchased only by the current shareholders or also by outsiders.Based on this point, the price of the shares should also be agreed on.
The agreement should define what kind of events, e.g. a death, disability, retirement or departure of one of the owners, will trigger the buyout. In case the purchase is activated, the means of funding the purchase should also be spelled out to ensure the proper planning of company liabilities. For more neutrality, it is recommended to engage a professional service to create the agreement.
How to fund a Buy-Sell Agreement?
There are a number of ways to fund a Buy-Sell Agreement in Singapore. This includes cash payments from personal savings, sale by instalments, and proceeds from disability or life insurance. Insurance is often featured in Buy-Sell Agreements. This is because, in order to ensure the availability of funds in the event of an owner’s death, most parties will purchase life insurance policies on the other owners. Should one of them suffer from a critical illness, total and permanent disability, or pass away, the payout from the insurance will provide the adequate funding to buy out the shares, and ensure business continuity.
Planning ahead and getting a Buy-Sell Agreement as early as possible allows companies to better manage business operations in case of unpredicted situations. It is recommended to engage a professional services firm, like AM Corporate Services, which will provide advice on the right type of Buy-Sell Agreement based on your business needs and also to prepare the necessary documentation.Contact us now for consultation!