Business Continuation Plan (For Equity)
HOW TO SURVIVE THE LOSS OF YOUR BUSINESS COLLEAGUE
Whenever two or more people come together in a business enterprise it is because they have complimentary skills, knowledge or experience, or because of financial considerations.
The primary objective of being in a business is to make a profit and, in the good times, each business colleague shares in the profits. However, when the going is not so good, each principal similarly shares the losses.
If you are unlucky enough to lose a business colleague - whether because of death, disablement or simply because he or she wishes to start a new venture, this could have a disastrous financial result for your business and for you and your family.
Have you thought what would happen to you personally if you were to lose a business colleague?
(a) Your colleague's interest in the Business
Usually, you will have to find the money to pay out your colleague's interest in the business. This will require a complete re-organisation of the business.
Will you be able to find someone else to buy into the business? Will you be able to borrow the money? What is the business worth anyway?
How will your business survive this financial strain?
(b) Future profitability
With one key person no longer helping to produce profits for the business, its long term future profitability is thrown into question. Will the bank call up any loan facility? Will your clients buy from competitors? Will your employees get restless and leave? Will your suppliers continue with credit arrangements?
Unless you manage to restructure your business effectively and quickly, you may find that you have to sell out at whatever price you can get for the business and suffer the financial consequences.
But there is a better way - a BUSINESS CONTINUATION PLAN can provide the cash funds to enable you to:
- Buy out your business colleague's interest at a predetermined fair price.
- Pay out all the debts on the business.
- Maintain profitability of the business for a period of time until you can find a new business colleague or until you otherwise restructure your operation.
There are two main sections to BUSINESS CONTINUATION PLAN.
1 LEGAL DOCUMENTATION
All the documentation you need to establish the plan can be arranged. This documentation may include:
- A Cross Purchase Agreement - formally enabling you to buy out your business colleague's interest should he/she die or become permanently and totally disabled.
- This Agreement will also enable you to fix the price at which the business interest will change hands.
- Board Minutes - evidencing your desire to set up the Plan.
- Legal and Taxation Notes - which explain the technical laws which govern the operation of the Plan and the rights and obligations of all parties.
2 FUNDING THE PLAN
Because a Cross Purchase Agreement is a legally binding contract, it results in a legal obligation for monies to be paid should an event occur which is the subject of the Agreement. Therefore, you need to arrange for the payment of the amount nominated in the Agreement. Additional sums may also be required to pay out any debts owed by the business. The three main ways of achieving this are:
- from your own personal savings
- by borrowing the funds
- from the proceeds of a life insurance policy, total & permanent disability policy (TPD) and/or trauma policy -where your colleague's departure from the business is a result of death, disability or a serious health event and their departure is an Involuntary Departure
Whilst any one of these options may apply in particular circumstances, the usual way of making provision for payment of the monies whee there is an Involuntary Departure is by the use of insurance.
LOSS OF KEY EMPLOYEE
A similar financial loss can be incurred by a business if that business loses a key employee rather than the principal. Again life insurance can be used to protect a business against this situation.
Visit my website at the following link to see how a Buy/Sell Agreement Works; Click HERE