Newsletter: April 2005

THE CONSEQUENCES OF DEATH OR DISABILITY OF A CO-OWNER IN A BUSINESS

The death or disability of one of the partners in a Partnership, co-shareholders in a Company or a member in a Close Corporation can be devastating for the remaining owner(s) or the heirs of the deceased.

In the event of the death of one of the owners of the business, the remaining owner(s) will be obliged to negotiate with the deceased’s heirs on how to deal with his/her interest in the business. Any one of the following outcomes can be problematic for the remaining owner(s):

-	The deceased’s interest in the business could be sold to a third party. This means that the remaining owner(s) might be forced to co-operate in business with someone that they cannot get on with.
-	The heirs of a deceased owner, who could lack the necessary knowledge, skill and ability, may insist on joining the business.
-	The business might be liquidated which means that the remaining owner(s) might have to seek employment elsewhere or start building a new business.
-	A situation might arise where the deceased’s heirs insist on sharing in the profits while the remaining owner(s) have to do all the work in the business.

In addition, the heirs of a deceased owner might have to deal with a number of uncertainties. It might take months or even years for the negotiations with the remaining owner(s) to be finalised and as a result thereof for the estate of the deceased to be wound up. This can lead to financial difficulties and hardship. They can also be forced to sell the deceased’s interest at a value far lower than the fair market value.

The same type of difficulties can arise in the event of one of the co-owners becoming permanently disabled.

An effective solution to the problems mentioned is for business owners to enter into an agreement which contains provisions for the continuation of the business in the event of the death or disability of one of the owner(s). One of the ways in which this can be dealt with is for the co-owners to undertake to purchase the interest of their fellow co-owners should any of them become permanently disabled.

This type of agreement, which is normally referred to as a buy-and-sell-agreement includes the undertaking that the first dying will, on his/her death, sell his/her interest to the remaining co-owners. A method for valuing the interest in the business should also be included in such an agreement.

Provision must also be made for funds to be available in order for the stipulations of the agreement to be implemented. Business insurance or the allocation of funds in a separate investment for this purpose are some of the methods that can be used in this regard.

By dealing with these issues and preparing the necessary agreements in this regard, business owners ensure that:

-	their rights are adequately protected in the event of death or permanent disability of one of them for instance securing complete and unhampered ownership of the business in these events;
-	uncertainty as far as heirs are concerned are eliminated by for instance paying them a fair market value for their interest in the business;
-	the business is not drained of its capital resources;
-	the business operations continue with the minimum interruption;
-	there is no risk of unskilled or incompatible co-owners joining the business.

By entering into an agreement which makes provision for a situation where an owner dies or becomes permanently disabled, business owners ensure that the interests of remaining owners as well as heirs and dependants are protected.

By
Una du Toit
(April 2005)