From Daily Maverick · Kenny Meiring · · 1m 40s
Plan ahead for business shares after a partner dies
Without a buy-and-sell agreement, a spouse may inherit business shares they cannot sell or manage.
In brief
Without a buy-and-sell agreement, a spouse may inherit business shares they cannot sell or manage. Business owners should set up buy-and-sell agreements with life insurance to ensure spouses receive fair value for shares if a partner dies. Originally reported by Daily Maverick.
What happens to business shares
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When a business owner dies, their spouse does not necessarily inherit the shares. What happens depends on the owner's will and agreements governing the business.
The problem with inherited shares
A business interest worth several million rand on paper may have only one realistic buyer: the remaining shareholders. A spouse with no involvement in the business may struggle to sell.
A concrete example
A husband owns one-third of a fifteen million rand business worth about five million rand. His widow may inherit a five million rand asset she cannot easily sell or manage.
The buy-and-sell agreement
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A buy-and-sell agreement sets out what happens to business interests when a shareholder dies. It can require surviving shareholders to buy the deceased shareholder's interest at a fair price.
Life insurance funds the purchase
Surviving shareholders need cash to buy the deceased partner's shares. Life insurance policies on the deceased owner provide the funds needed to complete the purchase.
Keep valuations current
A business worth six million rand ten years ago with two million rand life cover per shareholder may now be worth fifteen million rand. Valuations and insurance must be reviewed regularly.
Act while everyone is healthy
Buy-and-sell arrangements need proper legal and tax structuring. Partners should set them up while all owners are alive and healthy, with spouses understanding the arrangement.
The takeaway
Business owners should set up buy-and-sell agreements with life insurance to ensure spouses receive fair value for shares if a partner dies.
