FINANCE WELLNESS COACH: Plan ahead for ownership after the death of a business partner

You need a structure to ensure that the remaining shareholders give you a fair price for the shares that were owned by your spouse.

Question My husband owns a business with two partners. If my husband dies, what happens to his shares and how do I make sure I receive the value of his share of the business?

You do not necessarily inherit the shares themselves. What happens will depend on your husband’s will and the agreements ­governing the business.

Although the business interest may be worth several million rand on paper, it is not necessarily an asset that can simply be sold when the money is needed. In many private businesses, there may only be one realistic group of buyers for those shares – the remaining shareholders.

You therefore need a structure to ensure that the remaining shareholders give you a fair price for the shares. This is where a properly structured buy-and-sell agreement can play an important role.

Assume, for example, that your husband owns one-third of a business along with two other shareholders. The business is worth R15-million, making his share worth about R5-million. If he dies, that R5-million business interest represents a significant asset in his estate, but you may have no involvement in the business and no desire to become involved in running it.

At the same time, the two surviving shareholders may have spent many years building and managing the business alongside your husband. They may not want to find themselves in business with a deceased partner’s spouse who was never involved in the company in the first place.

The practical outcome in many cases is therefore that the surviving shareholders acquire the deceased shareholder’s shares and the estate receives fair value for them.

In our example, instead of you inheriting a one-third interest in a business that you do not understand or cannot easily sell, your husband’s estate would receive about R5-million in cash.

A buy-and-sell agreement is essentially an agreement between business owners setting out what will happen to their interests when a particular event occurs. It can provide that, when one shareholder dies, the surviving shareholders are required to buy the deceased shareholder’s interest.

This sounds relatively simple, but it immediately creates another problem: where do the surviving shareholders find R5-million?

Going back to our R15-million business, let us assume your husband’s one-third share is worth R5-million. The arrangement could be structured so that the other shareholders have appropriate life policies in place on your husband’s life. If he dies, the policy proceeds provide the surviving shareholders with the funds they need to buy his shares.

The effect is that the surviving shareholders receive the shares and can continue with the business, and your husband’s estate receives the agreed purchase price.

One of the biggest problems with buy-and-sell arrangements is that they are put in place and then forgotten about. A business may have been worth R6-million 10 years ago, with each of three shareholders insured for R2-million.