Purchase/sale agreements also protect multiple owners when the interests of one owner do not match the interests of the others. For example, if one of the owners wishes to transfer their business interests to a third party, the purchase/sale agreement may dictate the rules of that transaction. When a client of a company leaves, whether due to retirement, new horizons, disagreements, illness or death, there is a real period of danger for the company. If the business cannot successfully transition to a new ownership structure, its viability may be compromised or it may ultimately fail. To ensure that the agreed succession plan then works, the company structure must be reviewed and, if necessary, updated to a more appropriate structure, as well as written processes and effective documentation put in place. Business succession planning is perhaps one of the most difficult issues a small business entrepreneur will face. The owner must consider how best to maintain his business and also consider family, tax and estate issues. A well-thought-out succession agreement can minimize friction between owners, parents, and key executives, and ensure the business continues for the next generation. Although the focus is most often on life insurance as a financing solution, due to its availability and generally reasonable cost, there is a much higher risk that an owner will suffer a temporary or permanent disability in the working age years before retirement. What would happen to the company if the owner of the “rainmaker” had a car accident and could not work for six months? What if a chronic illness like cancer makes it difficult for an owner to dedicate more than a few hours a day to the business? What if there is a disagreement between landlords about whether a homeowner is actually disabled? Because of the statistically higher prevalence of disability – and the many shades of gray associated with a disability claim – purchase and sale contracts should provide for specific mechanisms that cover these types of problematic scenarios. Funding considerations should also be addressed, as it is usually much more expensive to insure against disability than against death. The first step in developing a follow-up agreement is to fully involve all stakeholders. It`s not just the entrepreneur`s son and brother who need to be evaluated on the owner`s intention to retire, it`s all the key management and even the clients.
In addition, it is even better to involve all stakeholders before the owner`s retirement is imminent. This way, there is adherence to the plan well in advance of the owner`s retirement date and the company has a chance to make a smoother transition to new owners. Current owners can confirm whether they want to take a step back, retain some ownership and control, give up ownership and ownership altogether, or continue in business and plan for succession on death. .