When a business co-owner dies, the affected owner’s estate can be left severely exposed, with the remaining owners facing potential problems. Alternatives to insurance through a buy-and-sell arrangement is to borrow the money needed from a commercial bank, to buy the deceased owner’s share. However, even if the business is successful in obtaining such a loan, the terms and repayment period could possibly make it unaffordable from a cash-flow point of view. In most cases, insurance would therefore be the more affordable solution.
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According to the agreement, each co-owner takes out life cover on the other co-owners’ lives. The life cover pays out on the death of a co-owner, which funds the purchase of his or her interest by the surviving co-owner(s). Disability cover can also be included to fund the buyout of a disabled owner’s share of the business.
Potential challenges regarding the deceased person’s estate:
- The remaining owners might not have the resources to purchase the shares from the estate.
- A spouse may not want to participate in the business which means that he/she is left at the mercy of the existing owners.
- The deceased owner may have had unique skills that he/she brought to the business, meaning that the risk in the business increases if those skills are no longer available to the business.
- The deceased owner may have earned a salary in the business, and when he /she dies,a the spouse cannot simply claim that salary unless he/she actually works in the business on the same basis as the deceased owner.
- The executor of the estate of the deceased owner might interfere in a business about which he/she knows nothing.
- He/she might want to sell the owner’s interest to the highest bidder, opening up the business to unknown external investors.
- The existing owners may not have the funding to repurchase the deceased owner’s interest at that stage.
