Buy-back agreements

A “will” for businesses

Any lawyer, notary or accountant will advise a well-managed business to set up a buy-back agreement in order to determine how ownership will change hands and how the transfer will proceed. However, does your business have such an agreement?

The process involved is comparable to preparing a will for your business. Since many individuals do not take the time to draw up a personal will, it is not surprising that many business owners have postponed carrying out this important task. If you want to avoid numerous problems in the future, you should meet with your notary or lawyer so that they can help you set up a buy-back agreement for your business.

Premature death clauses are often dealt with first

For those who already have a buy-back agreement, the clause that applies to the premature death of an owner is often dealt with first. The concern about premature death runs high and the buy-back agreement stipulates how the business interests will be transferred in the event of the death of one of the owners.

Buy-back agreements in the case of premature death are generally funded with life insurance.

A life insurance policy will :

Provide cash when needed

Avoid a drain on working capital

Preserve reasonable value in the business for the deceased’s family

Ensure that the deceased’s family is not required to become involved in the business operations

As an integral part of the services we provide, we can work in collaboration with your professional advisors to set up a proper life insurance plan that will fund the buy-back agreement should one of the partners die.

Does your buy-back agreement contain a clause that provides for a partner’s disability?

If your partner does not die, but instead suffers a long-term disability, whatwill happen? Could one of these situations arise?

Your disabled partner continues to collect a salary and share in the profits without being an active contributor to the business. A replacement is hired, creating TWICE the cash drain on the business.
Your disabled partner may try to maintain his pre-disability standard of living and decide to sell his business interest to a third party. The disabled partner may be forced to liquidate his/her interests since he/she is in urgent need of cash.
The new partner a co-owner with the existing owners, who continue to suffer financial losses incurred as a result of the disability of one of the firm’s key people.

A partner’s disability presents many of the same problems and potentially creates even more financial difficulties than death because the partner expects to continue to draw cash from the business since he/she is alive and is still an owner.

Yet many buy-back agreements do not have a clause providing for a partner’s disability. Or if one does exist in the contract, most businesses do not have a financing plan for the buyout of a disabled partner.

How will the disability buy-back agreement be funded?

Will the business have the financial resources required be able to buy back the shares of a disabled partner if the human capital and borrowing power are already weakened because of the partner’s state of health? The answer is probably no.

The solution: Partner buy-out insurance

This policy is designed to provide you with the necessary funds to facilitate the implementation of a buy-back agreement if you become totally disabled following an accident or illness. It helps protect your capital without draining the business resources.

As an integral part of the services we provide, we can work in collaboration with your professional advisors to develop a proper funding plan in the event that you or one of your partners should become disabled.

The chart below illustrates the likelihood of at least one disability lasting more than 12 months among a group of 2, 3 or 4 business owners between the ages of 27 and 52.

Average Number of Owners
Age 2 3 4

27                              26.3%                    36.7%                    45.7%
32                              25.6%                    35.8%                    44.7%
37                              24.5%                    34.5%                    43.1%
42                              23.0%                    32.4%                    40.7%
47                              20.7%                    29.4%                    37.1%
52                              17.4%                    24.9%                    31.7%

Source: "Disability Income, 2nd edition" by Jeff Sadler, published by National Underwriter

In light of the numbers shown above, ignoring the risks associated with the disability of someone within a business could result in a significant financial risk.

› Why You Need Disability Insurance & Disability Statistics