When a partner or principal shareholder in a business dies, the disposition of his/her interest in the business can create problems for the remaining shareholders and their heirs.
What will happen to the shares of the deceased?
Who will purchase the shares of the deceased?
What is the fair market value of the shares in the business?
Where will the funds come from?
A Shareholder Agreement is the "business will" between the partners/shareholdrs. It is a legal binding agreement that dictates what happens to the shares of a deceased, disabled or quitting shareholder. It allows all the shareholders to agree (from the beginning) the terms on how their shares would be handled by the company if an event were to occur (death, disability. retirement, resignation of an owner).
ABC Manufacturing Inc is a partnership with two owners: Mike and Dave. If Mike were to pass away, his personal will dictates that his shares in ABC Manufacturing Inc would be passed on to his son Tyler. Tyler has no experience in running the business. Dave does not like the idea of now sharing the company with Tyler. It is reasonable to assume that if Dave passed away, Mike would feel the same way about his heirs. Setting up a buy-sell agreement will ensure the Dave will attain full control of the company. It also assures the deceased that his heirs will receive a fair price for his shares.
Loan from the bank?
Capital from within the company?
Corporately-owned Life Insurance?
In many cases, banks are hesitant to lend money to a company for the buyout of a deceased shareholder. Accessing available capital from within the company to pay off the heirs of the deceased can be very damaging to the company.
Life insurance is the most certain and economic way to provide cash at death to help partners plan for the future.
We have provided a valuable Shareholder Agreement Checklist. (Click here to download the pdf.)
For more information contact: Clinton Rayfield