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- Email: jacobus@hfmdirect.co.za
A buy and sell arrangement, supported by a buy and sell agreement and life insurance, will ensure that on the death of a business owner, the business can continue to operate with as little disruption as possible for the surviving business owner/s, as well as ensuring that the estate of the deceased business owner receives fair value for his/her business interest, as well as settlement of his credit loan account. Interestingly, there seems to be a trend for business owners to transfer their business interest into a trust. Note that where a business interest is held in a trust (or a corporate entity, such as a company) the reality is that even though the trust or corporate entity can continue to hold the business interest in perpetuity, there is often only one of the trustees/shareholders who is directly involved in the business, who influences the success of the business and upon whose death, and therefore, in all likelihood, the trust or entity would no longer wish to continue to hold its interest in the business, as it would not make commercial sense to do so.
Why is it important from the surviving business owners’ perspective to have a buy and sell arrangement in place?
The survivor/s would want to buy the deceased’s interest in the business, but may not have the money readily available to do so. They may need to raise finance, and if they are fortunate enough to be able to do so, interest will be charged on the capital, meaning that over the term they will in fact pay a lot more than the original purchase price for the business interest
If they are unable to raise the finance then the late co-owner’s spouse or dependants may step into his/her shoes in the business and become a co-owner with the survivors. In many instances this may be highly undesirable.
If the spouse (or dependants) does become a co-owner, they may not have the necessary knowledge, skill or expertise to be of value in running the business, and will simply be a drain on the business.
The survivors may have to pay a “salary” to someone who is not actively contributing to the business, in order to buy that person out of the business over a period of time. This could impact on the long term viability of the business.
If the trust/corporate entity had to continue to hold the business interest, without making a true contribution to the running of the business, it would still be entitled to share in the profits of the business. This could have a negative impact on the profitability and viability of the business in the long term
If the deceased co-owner has a credit loan account, this must be settled on his/her death. If there is insufficient liquidity in the business this could pose a very serious problem.
Why is it important from the deceased business owners’ perspective to have a buy and sell arrangement in place?
The potential capital growth (in terms of the value of the investment in the business) will be left in the hands of the surviving co-owners ability and willingness to continue to run the business profitably, which may not be in the best interest of the trust beneficiaries, who may not have the ability or inclination to be actively involved in the day to day running of the business. The value of the business may well decline and the trust beneficiaries’ entitlement would decline accordingly.
On death the surviving spouse and/or dependents will have to negotiate a price for the interest in the business, and may not receive a value which in the deceased’s estimation is a fair value.
The surviving spouse and/or dependants may be compelled to become co-owners of the business. They may not have the ability or the desire to fill your shoes and this would thus be a burden to them.
The surviving spouse and/or dependants may have to receive the value for their share in the business over a number of years, paid in instalments. If the business does not continue to operate successfully, they will never receive the true value of the deceased’s share in the business, as reflected at the date of death. Their destiny will be tied.
Key person assurance
Keyperson assurance refers to policies effected by an employer on the life of an employee with the purpose of compensating the business for the loss it will sustain should the employee die or become disabled prematurely.
The plan guarantees that cash will be available to absorb any disruptions
to the business, protect existing credit facilities and provide the necessary funds for the recruitment and training of a replacement.
It is important to note that a keyperson is an individual that has an important impact on the future income and profits of the business. It’s not just any employee, but someone who’s absence, whether through death or disability, will severely impact the future sustainability of the business.
Loans are made by the company to shareholders, directors or employees
(e.g. instead of receiving dividends or increases in salary).
Clearing debit loan accounts:
(i) Bequeath the estate or portion of it to a beneficiary provided he/she takes over the debit loan account.
(ii) Bequeath shares to a testamentary trust provided the trust takes over the debit loan account.
(iii) Bequeath shares to a charitable institution provided it takes over the debit loan account.
(iv) Cover with life assurance
Loans are made by shareholders to the company. This makes it easier to withdraw funds from the company. The loan account ranks as a concurrent claim on liquidation.
(c) Clearing of credit loan accounts
(i) The company can effect a policy on the shareholder’s life. Note that the value of the life assurance will not be exempt from estate duty in terms of s.3(3)(a) of the Estate Duty Act.
(ii) The shareholders can include the credit loan account in their buy and sell agreements. The value of life assurance used to fund the
buy-and-sell agreements would be exempt from estate duty in terms of s.3(3)(a)(iA).
Premiums &
A member/shareholder of a close corporation/company often has to sign surety as co-principal debtor or provide personal security for a loan taken out by the business. The member/shareholder can thus incur personal liability:
(i) during his/her lifetime if the business cannot repay the loan; or
(ii) on death or permanent disablement, if the business is then unable to repay the loan; or
(iii) if no one can replace him/her as guarantor or no alternative security can be given, a solution for this problem can be achieved through the business contingency plan.
The business insures the life of the member/shareholder who has signed surety or provided personal security for the loan effected by the business.
The policy should preferably include disability cover and the amount of life and disability cover should be equal to the loan amount. The business pays the premiums and an agreement is entered into between the business and the member/shareholder in terms of which the business undertakes to apply the proceeds of the policy to the repayment of the loan(s) giving rise to the personal guarantees given by the member/shareholder.
It’s your responsibility to help your employees to select a suitable retirement option. An accredited adviser can help you to select the most suitable retirement plan for your employees. And, as required by law, we will help you to communicate the following important information to your employees:
how the fund operates;
what benefits it offers;
whether the benefits that accrue to them will be enough to maintain a reasonable standard of living;
whether their medical expenses will be covered once they retire; and
what to do if they change jobs.
HFM provides corporate life-, disability- and credit risk benefits, so helping companies offer risk cover that enhances their attractiveness as employers of choice.
Group Risk Cover is a simple range of clear and understandable benefits and includes death, disability & critical illness cover.
The employer defines the benefit structure and provides the necessary funding for the selected benefits.
With Defined Cover all employees enjoy a core level of cover. Life and Capital Disability are also offered with Flexible Cover, which allows employees to voluntarily extend their benefits at their own cost.
At HFM, we offer unrivalled flexibility, so you can find a Medical Aid that best meets your individual needs and pocket. Through innovative benefit design and strategic partnerships, we provide you with exceptional value of choice.
Health Insurance is about peace of mind – and at HFM it’s about ease of use as well.
Experience the value of choice in medical aid. shape your benefits – and contributions – according to your needs.
Commercial insurance is insurance for a business. In fact, it is one of the most important investments a business owner can make. Commercial insurance can be instrumental in protecting a business from potential loss caused by unforeseen and unfortunate circumstances.
Commercial insurance can provide valuable protection against such things as theft, property damage, and liability. It can also provide coverage for business interruption and employee injuries. A business owner who chooses to operate a business without insurance puts his enterprise at risk of losing money and property in the wake of an unfortunate event. In some situations, a business owner may even place personal money and property at risk by failing to secure adequate commercial insurance.
Depending on your particular business, there may be some types of commercial insurance you don’t need. For example, you may need commercial property insurance, but not commercial auto insurance. Keep in mind, however, that it is wise to learn about the different types of commercial insurance, even if you don’t need them all. As your business grows and expands, you may discover that your insurance needs change. Obtaining preliminary information now will provide you with the basic information you need to decide whether or not to add to or change your policy later.
Though most businesses are able to obtain commercial insurance with ease, for others, securing insurance is difficult. For example, a business that has already experienced a considerable loss may be viewed as a high-risk company. To insurance companies, significant previous losses translate into a heightened risk of high or frequent claims.
A business may also be considered high risk if it is fairly new or involved in operations that make frequent insurance claims more likely. In such situations, securing commercial insurance is not impossible. However, your agent may need to provide you with options for finding insurance through non-standard avenues.
Our expert knowledge enables us to have the flexibility to advise clients on all commercial policy requirements. These include Goods in Transit, Business Interruption and Property Damage.
For most small to medium companies, we can quote and place covers the same day or we can arrange more complex policies following on-site assessments of your requirements.
We can assure you that any claims or queries will be dealt with in the most professional and efficient manner.
We offer a wide variety of commercial insurance, whatever the size of your business, we are confident we can offer you insurance to suit your needs.
Our Commercial Insurance’s include:
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