Buy-Sell Agreements are the typical ‘say what you want first, don’t agree later’ kind of contracts. Hence they are usually made in advance - a pact amongst the business owners on the terms and conditions for the buyout of a business interest, in case one of the shareholders has to withdraw from the partnership by death, divorce, disability, personal bankruptcy or even the violation of the company’s contract or policy.
Regardless in Malaysia or Singapore, it is crucial for shareholders of a closely-held business to sign a Buy-Sell Agreement at the start of the business operations.
The Primary Benefits Of Buy-Sell Agreements Are As Follows:
● They support succession planning to prolong business stability. This is especially relevant in cases of unexpected occurrences such as death or disability - since the terms and conditions are already laid out and agreed upon, confusion and disputes can be avoided.
● They allow all issues and concerns to be addressed when relationships are still neutral. Tough conversations can take place early to iron out conflicts in opinions, where shareholders are forced to evaluate all possible scenarios and express their views, so in case of a buyout, everyone receives a fair result as much as possible.
Despite the obvious reasons stated above, there is still a mutual ignorance, amongst business owners as we have observed, on the importance of the Buy-Sell Agreement - either there is none of it or it is redundant by the outdated terms and conditions.
Good Practices Of Drawing Up and Maintaining A Useful Buy-Sell Agreement:
● Consider tax and legal implications
A buyout would always involve tax and other legal implications, especially when the withdrawal of a shareholder involves a divorce or bankruptcy.
Hence it makes sense to think ahead, consider all the possible taxes and legal consequences, and evaluate their impact on the buyout, any personal circumstances and the business operations. Then include clauses into the Buy-Sell Agreement to protect individual interests and avoid unfair treatments.
A fair buyout should not incur a tax burden on the withdrawing shareholder; it should not affect normal business operations; and it should be able to protect the remaining shareholders from any unfair legal consequences. Hence a good buy-sell agreement would reduce internal conflicts and allow the remaining shareholders retain control of the business, giving them a peace of mind to focus on running the business; and this can be achieved with the help of a neutral external expert.
Once the proper agreement is drawn up and signed, it should then be updated regularly in view of a major change in the business or other arrangements.
● Determine the funding for the buyout
Many buyouts have happened suddenly, such as the death or disability of a fellow partner, and the shareholders would be caught unprepared and not able to participate in the buyout.
Hence it is wise to specify in the Buy-Sell Agreement on the ways to finance a buyout.
Some possible ways of financing a buyout are:
- Taking out life insurance policies
- Using an instalment payment plan
- Using business’s working capital
- Using a line of credit
● Agree on a valuation method
As business valuation is, at its core, a subjective matter, and it concerns everyone’s vested interest, such as return of investment, it is often most disputed among other discussion topics during a buyout. Hence it is most important to decide how the business should be valued.
For example, the agreement can specify, at the time of the buyout, whether to use a multiple of earnings or sales to work out the value of the business, and subsequently the individual owning interest.
Other aspects of the business valuation that needed to be addressed would include: whether to consider intangible assets, and which ones to consider. So even though the valuation formula is direct and simple to use, there are many layers of issues to discuss and iron out. Here again, a neutral external expert can offer independent opinions and the best estimated value of business.
Though a business valuation can be conducted when needed, there is value in doing it once when the shareholders have confirmed an agreement and then annually thereafter - this will ensure the relevance of the result of the business valuation, and help the business owner to monitor the changes in the business value for personal interests and estate planning purposes.
● Seek help when needed
As a Buy-Sell Agreement has far reaching effects for the business owners’ and the business’s financial situation, there is definitely value in engaging a law, an accounting and a valuation professional to draw up and evaluate the Buy-Sell Agreement.
A competent team of these experts can help ensure a solid agreement that is proper, complete and encompassing, taking care of all the desires and needs of everyone in the business partnership.
A well-structured Buy-Sell Agreement in Singapore and Malaysia can definitely help the business and its owners save a lot of money in future legal settlements, and avoid any unnecessary costs and unwanted problems.
Speak with a specialist business valuer today.