Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
136. Buy and Sell Agreements: The Legal Foundation Your Partnership Needs
What happens to your business when a partner unexpectedly dies? Without proper planning, their spouse might show up at your office the next day, declaring themselves your new business partner. This nightmare scenario plays out more often than you might think.
In this deeply practical conversation, we explore the critical difference between having life insurance and having the legal framework that makes it work. Many business owners make a dangerous mistake: they secure life policies but neglect the formal buy and sell agreement that ensures those funds properly compensate a deceased partner's family. Without this legal foundation, surviving partners can receive insurance payouts with no obligation to transfer those funds to the deceased's estate—leaving families with nothing while the business continues without them.
We break down exactly how a proper buy and sell arrangement works: partners take out life policies on each other individually (not through the company), and when one partner dies, the insurance pays out to fund the purchase of shares from the deceased's estate. This creates a clean transition that protects both the business and the partner's loved ones. We also tackle challenging scenarios like uninsurable partners, explaining how payment plans can be structured over 36-60 months to accommodate these situations.
Your business documentation must work harmoniously—shareholders agreements, MOI, and buy and sell agreements should "sing from the same hymn sheet." The life insurance coverage must reflect current business valuations, requiring reassessment every few years. We also explore tax implications, insurable interest requirements, and why professional guidance is essential throughout this process.
Ready to protect what you've built? Take action now to ensure your business partnership has the proper agreements in place. Your legacy—and your family's financial security—depend on it.
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www.growthfp.co.za
Hello everybody, welcome to Know your Money. I'm Bronwyn Wehner.
Speaker 2:And I'm Craig Finch and we are from Growth Financial Planning. We hope you enjoy our podcast. Hi everybody. Today we're following on from our episode last week. Last week we did key man insurance. Today we thought we'd talk about buy and sell, so a buy and sell agreement and the life policy that goes with it. So, bron, we've got a company together, you and I. We're both shareholders in the company and we have got a buy and sell agreement in place and a shareholders agreement. We'll talk about the buy and sell agreement. So, warren, the buy and sell agreement is a legal document that says that if I die, become permanently disabled or retire, I have to sell or at least offer my shares to Bronwyn. I can't come to you, so I can't sell it to Bronwyn. The same story.
Speaker 3:We have that in our business, yeah.
Speaker 2:Okay.
Speaker 2:So the important thing is the legal agreement. Now a lot of companies will put the life policy in place, but not the legal agreement. So it's much easier to effect a life policy on Bronwyn and me and the legal agreements like a real mission, because you've got to go through a lawyer that's the best thing you can do and you've got to thrash out little points that might not apply to you, but at the end of the day you need to sign that buy and sell agreement. So, and then? Why do you have a life policy? Well, you've got to fund it. So if Bronwyn wants to buy my shares, she might not have the money readily available, and vice versa. So we take a life policy on each other's lives.
Speaker 2:So the life policy works like this Warren, if I die, the policy pays out to Bronwyn. Now, if I don't have a buy and sell agreement, a legal agreement, bronwyn doesn't have to pay that money to my wife, because now Bronwyn doesn't want my wife to be a shareholder in the business. Because what's going to happen if I die? My world says everything goes to my wife, everything is my shares in growth financial planning. So then suddenly world's got growth financial planning, all my shares in that and knocks on the door the next day and says morning, bronwyn, I'm now your partner in growth financial planning. Bronwyn says not a chance, I don't want you as my partner. So the only way around that is to make sure the legal agreement's in place. So what happens then? I die. The life policy pays to Bronwyn. Bronwyn in turn pays that to my wife, my estate, and then she owns the shares. Now my full shares in growth financial planning is now owned by Bronwyn. What does my estate or my wife receive the money? So she receives my shares on?
Speaker 3:death. So it's a clean way for your shares to exit from your wife or your estate, whatever it is, and for you to get paid out or your wife to get paid out.
Speaker 2:Whatever it is, and for you to get paid out or your wife to get paid out, the most cash flow easy way when you feel like to say that is to affect the life policy because you're not trying to find a lump sum of cash to pay the partner out.
Speaker 3:As a business grows or shrinks, how is that payout determined as the years go by, so you've got to go for underwriting again and increase it or decrease. How often would you?
Speaker 2:do that. You should do it annually. You should look at the value of the company annually.
Speaker 3:Sometimes it's a three-year cycle and then you say, okay, every three years I'm going to look at the value of the company and I'll adjust the life insurance policy accordingly, Because obviously the insurers, if your company was in steady decline over a couple of years and then this happens, they won't want to pay out the good times amount, will they no?
Speaker 2:they will, but you could have a problem with a tax man.
Speaker 3:So that's another very technical area.
Speaker 2:But you could have if you've overinsured what the value is, there could be a problem there. So that's why it needs to be financial planner every year, or at least every three years. Sit down, look at the legal agreement, make sure that's valid still and look at the life cover and your valuations are still in line with the cover exactly very important there. So what we find is a lot of companies have the life policies in place because that's an easier thing to do and they go yeah, let's put the life policy in place, we'll do the agreements later.
Speaker 2:Mostly they don't do the agreements the agreement's the most important thing.
Speaker 2:And if one party dies and we've heard this before the other one gets paid the life insurance and doesn't pay it over because they say, oh, I don't want the company, anyway it's worth nothing, so I'd rather take the lump sum of money and I'm off, I go Wow. Whereas the lump sum of money should have gone to the deceased estate and their family gets looked after. But often it doesn't because there's no legal agreement in place. So if you are in a partnership in a company, you need to have a buy and sell agreement as number one, the legal agreement that determines death, disability and retirement, and the easiest way to fund that is with a life policy.
Speaker 1:And then also, just in terms of that agreement, it's really important to bring all your other documents, like your shareholders agreement and your MOI, and make sure that they all talk to each other, because they've got to say the same things and have the same Got to sing from the same hymn sheet.
Speaker 1:Exactly so. It is really important. And then what Craig was saying is this doesn't help with what capital gains tax you might pay. So if your shares were only 100 rand and now they're 1,000 rand, your estate would still be liable for the capital gains tax that comes from that. This policy doesn't cover that.
Speaker 3:If you have a buy and sell agreement but don't have the insurance policies? What happens then?
Speaker 1:So we actually have that.
Speaker 2:You've got to fund it then. So the other partner will say let's say one of the partners is uninsurable. Yes, and then now what? How am I going to pay that person's estate? Then you come to an agreement that you're going to pay that amount, the valuation at time of death over a 60-month period or a 36-month period.
Speaker 3:Right Okay, what the business could afford to do effectively, or what the other partner could afford to pay out over that period how they get the money. I'm sure you could structure it so that it actually comes out of the business, could you? Because I mean, that's an obligation to put on one party, isn't it? Yeah, quite an obligation. By the way, you've got three kids in private school. Unfortunately, your partner died.
Speaker 1:Now you've got to come up with this amount of money for the next 60 months, but let's say, for example, the company was generating 200,000 rand and that partner was getting 150 of that 200,000 rand. If that partner passes away, you now get that 150, as long as you're still generating the same kind of income, and you can use that to fund that. So it is also important in that agreement to say, okay, valuation at death, but let's re-evaluate every year or two years. It can be good or bad.
Speaker 3:And can you amend an agreement once it's been signed, if the two parties come?
Speaker 1:together If they're both alive.
Speaker 3:Yeah, I'm saying if you're both alive you go okay, situation's changed, let's amend this For sure.
Speaker 2:Yes.
Speaker 3:Exactly.
Speaker 2:But if you don't have the legal agreement and the person dies, the estate, like Capital Legacy winding your estate up will come to the Bronwyn and say, oh, the value of the company is X, craig shares are Y, you need to pay him that out, pay his estate out. And there's no agreement in place Before they wind the estate up they will expect maybe Bronwyn to pay the company or her if she's going to inherit the shares. They expect her to pay that amount of money.
Speaker 1:And then leave your partner having to go try and get a loan, and what if they can't get a loan, and it's really, really complicated.
Speaker 2:So you rather have the agreements in place that says it's going to be paid over 60 months or whatever. You can amend the agreement as well. But I think the most important thing is in this whole basis is that in a business you've got a partner seek help from a lawyer to make sure that the buy and sell agreement is in place and it's signed and it does talk to the other agreements, the shareholders and the MRIs. All those other agreements must talk to each other and the easiest way of funding it is with a life policy.
Speaker 3:Yeah, so we did it all with the same lawyer, all of the parts, but we couldn't get the life policy on my partner because of his health. So that's why I asked, yeah, so then, in the agreement.
Speaker 2:As I say, you could have that roll out. No you should read it.
Speaker 3:My dad read it and he was like you're good.
Speaker 1:Okay, no, that's fine. I believed him.
Speaker 3:No, that's. Perfect, it's too, much, man. I don't understand this stuff.
Speaker 1:Then just another part is if certain requirements aren't met, it can form part of your estate also.
Speaker 3:These people try and make everything part of my estate. What now?
Speaker 1:It's not too much, but there's three things, sorry. The policy needs to be taken out by the person who, on the date of their death of the deceased, was a partner of the deceased, or that the policy was taken out and acquired by a person who held any shares.
Speaker 2:So Bronwyn takes one on me and I take one on her. Yes, In our individual capacity, not in the company. It's not key man, it's each other.
Speaker 1:And at the date of death, we still need to be partners.
Speaker 3:Oh.
Speaker 1:So who, on the date of death of the deceased, was a partner of the deceased? So you can continue these life policies on someone else's life because you own it, but it won't be free of estate duty if you're not partners at that time. Understood, yeah. Does that make sense, okay, and then that enables the person to acquire the whole or part of the deceased interest in the partnership because of that, and then no premiums of the policy needs must be paid by the deceased.
Speaker 2:The problem is got to pay for mine, I've got to pay for hers. No, swapsies, no. And then the proceeds must be paid out to each other like that.
Speaker 3:These life policies? Can you just get one on anyone?
Speaker 2:No, You've got to be in something called insurable interest. So now there's insurable interest between Bronwyn and myself and your partner. We can buy policies on each other's life, obviously with financial underwriting in place. If our business is worth a million, we can't have 10 million on each other's life. So that's got to be in place. And there's insurable interest because we're business partners. There's insurable interest between husband and wife. But I can't just insure your life even though we've got we're best friends yeah, we're best friends. I'm your client. I can't just do that on your life, because what's insurable interest?
Speaker 3:here. Friendship doesn on your life, because what's insurable interest? Yeah, friendship doesn't mean anything.
Speaker 2:So Al Campione was doing that was he yeah, unfortunately people didn't last too long, so you've got to have an insurable interest.
Speaker 3:So that was part of his scheme. He would take out the people he had insurance policies on.
Speaker 2:So that's wow, that's crazy you can't do that and In many cases in South African law some terrible instances where that's happened yeah, but you can't. You've got to have an insurable interest.
Speaker 3:And does that extend past husband and wife as into children as well, or not?
Speaker 1:I think, parents also.
Speaker 3:Yeah, you can insure your child's life. Yeah, it's a morbid thing to do, though.
Speaker 2:No, it is, but I mean there is an insurable interest there and vice versa. But yeah, so once again the life company will underwrite maybe an unusual situation. There was a very bad story a couple of years ago. This employer insured key man on these employees. They were traveling to part of the country but he welded the door shut of this minibus. Part of the country, but he welded the door shut of this minibus and they tipped this minibus over a cliff with gas bottles in it and this whole thing exploded and anyway there was one or two survivors out of the eight people and they told the story that they were forced in there and the doors were welded shut. And then there was. So they told the story. So the were forced in there and the doors were welded shut. And then there was. So they told the story. So the insurance company Obviously didn't pay out. Actually they did pay out I think it was Sunlum. They paid out the families.
Speaker 3:Oh, okay, that's good.
Speaker 2:So, even though, this person had paid the premiums on their lives for the company supposedly key man, because it was. You can't like Charles. That lawyer came here. You can't profit from your own hand, kind of thing.
Speaker 3:Yeah, yeah.
Speaker 2:Yeah, that word. But then Sunlum decided to pay out the families that were affected.
Speaker 3:That's a nice thing to do, yeah.
Speaker 2:But it was just terrible. So there's insurable interest and there's always an insurable interest between partners, underpinned by the buy and sell agreement. I hope that helps everybody it does Thank you Awesome.
Speaker 1:Thanks so much Thanks.
Speaker 2:Thank you for listening. If you have enjoyed this podcast and would like to subscribe, please visit our website, wwwgrowthfpcoza. The information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.