By 
Do business with one or more business ‘associates’. Chances are all business owners
They are involved in the day to day business. But what if you or they die or
withdraw from running the business? Here are some of the problems you may encounter unless you have a proper business succession document (often called a Purchase/Sale Agreement). We also present some of the options and issues in establishing a proper buy/sell agreement. These issues are the same regardless of whether your business is run through a company, mutual fund, or partnership.
Common problems
Here are some of the common problems business owners may encounter when one of the above events occurs: disputes between the continuing owners and the incoming owner of the business (the incoming owner may acquire their interest under the will of the deceased previous owner) . This often occurs because the new owner does not understand the business or does not have the respect of the other business owners; In a private business, the sale of part of the business to a third party is often not possible (ie external liquidity is limited). So there can really only be sales between business owners. However, without an agreement: the incoming owner (under a will) cannot force the other business owners to buy the part of the business from him; and remaining business owners cannot force the sale of the deceased business owner’s portion of the business; even if all the owners want a sale to take place, there are not enough funds to allow this; owners still working in the business are unhappy about having to pay ongoing returns to the new passive owner (ie, the deceased owner’s estate); and concerns about business continuity and viability, including from employees, customers, bankers, suppliers, and creditors who may drop or suspend support (particularly when owners are in dispute).
Purchase/sale agreements
Putting a Buy/Sell Agreement into effect can avoid some of the above and provide certainty for
business owners. In simple terms, a Sale/Purchase Agreement provides a framework under which business owners can sell their interest in the business or purchase the interest of a co-owner. For tax purposes (see below), buy/sell agreements typically use options to buy or sell on a defined triggering event (for example, the death of an owner). Generally: Owners who are not subject to the triggering event have the right, but not the obligation, to purchase the existing owner’s interest in the business (purchase option); The owner subject to the triggering event has the right, but not the obligation, to have the remaining owners purchase their interest in the business (put option).
Alternatively, a repurchase/refund agreement could be considered. Under such agreements, the business entity (for example, the business), rather than the other owners, buys back the existing property.
shares of the owner (note that there are Stock Companies Law requirements that apply to repurchasing shares).
Another alternative is to have a sale of the entire business when a trigger event occurs. we do not
Look at these two options in this document. Now we look at some of the issues you should
consider and resolve to ensure that your needs are met.
events
You must determine the triggering events or conditions that lead to the sale of a business interest. These are often tailored and limited by the funds available for any one purchase (see below). There are two broad categories of triggering events which are: involuntary or insurable triggering events (death, serious illness and total permanent disability); and voluntary or uninsurable trigger events (retirement, resignation, or legal termination of employment).
Call options are generally granted when both involuntary and voluntary trigger events occur. Put options are generally granted when inadvertent triggering events occur. Since insurance is not available for inadvertent trigger events, you may need to consider price reductions or payment in installments (provider financing provisions).
Price
The price at which an existing owner’s interest in the business will be sold must be set in accordance with
the Purchase/Sale Agreement and reviewed at agreed intervals. Alternatively, the parties should agree on a suitable valuation methodology and/or expert valuation process. Careful consideration should be given to any scenario that may justify a reduction in the price to pay. For example, a reduction might be appropriate in the case of put options for voluntary trigger events as discussed above (for example, if an owner is forced to resign for breach of a shareholder agreement or his employment is terminated for fraud). ). A reduction may also be appropriate in circumstances where an existing owner fails to maintain an insurance policy as required by the Purchase/Sale Agreement or invalidates an insurance policy.
money
A Buy/Sell Agreement is often fully or partially financed by insurance policies. For tax purposes, ‘principal ownership’ is generally used (meaning that each business owner owns their own
insurance policy). There are other options for ownership of insurance policies, but these may have
adverse tax consequences (including capital gains tax results in the payment of the
income from the insurance policy). There may also be tax differences in the treatment of insurance
premiums Therefore, tax advice is essential on these issues.
Alternatively, owners may decide to use their own capital, borrow money to finance the
sale, and/or enter into a supplier financing agreement. However, it is difficult to predict whether at the time a sale is required, the owners will have the funds available to make the purchase. The parties should consider the timing of payment (lump sum upfront or payment in installments). If payment is to be made over time through installments (supplier financing), collateral (for example, a mortgage) and interest must also be considered.
Capital Gains Tax
Care should be taken when drafting Purchase/Sale Agreements. Options should be used to avoid unintended consequences of capital gains tax (CGT). The celebration of practically any agreement can be an event of the CGT. However, a Purchase/Sell Agreement using non-exchange options will not create any liability for CGT at the time of signing. Rather, the CGT event and the resulting CGT liability will occur on exercise of the options (ie when an unconditional agreement to buy and sell an interest in the business comes into effect).
Likewise, when a business succession contract (including a sales contract) does not use options but conditions the sale of a business interest to the occurrence of an event, the CGT event will not occur upon signing but upon the fulfillment of that condition. If the Purchase/Sale Agreement includes supplier financing, the CGT should be carefully considered. Otherwise, a seller will incur the CGT and liability in one year, but may only receive the sale price for several years.