Obviously, no one starts a business on a whim and one day just opens up shop. Months, sometimes years, of planning occur before a business actually opens to the public. From the most basic of questions, such as what kind of business you plan to engage in, to more complicated questions, including whether you will have partners or investors, who will own how much of the business, and related issues, a great deal of thought goes into forming and opening a business. Often, opening a business can be the most expensive, ambitious, and risky endeavour you will ever undertake. Proper planning matters.
Financial Plans are Important for a Business
For many people, opening a business not only is a means of making a living, but a plan to leave something behind for their family. When partners or investors are involved, some very particular planning is required to ensure that the business continues even if some partners or investors decide they want out. If you are hoping that your business will live on for years and provide a means of income and employment for at least some of your children, you better have plans to make sure that can happen if one or more of your partners decides to get out of the business.
Business continuity plans usually deal with how to keep your business going in the event of a disaster. Well, partners who want to pull out can create a disaster if you do not have the proper plans in place to deal with the situation. What you need is a buy-sell agreement, and you need it from the minute you form your business.
If one of your business partners dies or decides to get out of the business, your best tool for dealing with that potentially business-ending event is a buy/sell agreement. A buy/sell agreement lays out the terms of ownership and operation of a business and is a must-have if you are starting a business with partners. The agreement sets forth the terms under which the business will deal with the death, disability, or retirement of an owner, as well as how to handle the departure of an owner from the business, even if that departure is under less-than-amicable circumstances.
No matter what the circumstances of an owner’s departure from the business, the buy/sell agreement, if established at the outset of the business, will dictate the conditions for the transfer of shares and business assets from the departing owner to the remaining owners. The idea is to let the departing owner depart with whatever that owner is entitled to while allowing the remaining owners to continue to operate the business. The primary elements of a buy/sell agreement typically include:
- A description of events that will trigger the buy/sell agreement (such as death, retirement, disability, or sale of an owner’s shares to a third party)
- A price for the departing owner’s shares, or a means for placing a value upon those shares
- The method by which the purchase of the departing owner’s shares will be financed.
There are many potential methods of financing a buy/sell agreement. The method chosen likely will depend upon the resources of the owners when establishing the business. That is why a buy/sell agreement must be agreed upon from the outset of forming the business. Without such an agreement, disputes are likely to arise if there is an attempt to reach a buy/sell agreement later, or if an owner dies or wants to leave and there is no buy/sell agreement in place.
If You are Planning to Form a Business in the Toronto Area, Talk to Beganyi Professional Corporation
If you are considering forming a corporation in the greater Toronto area, including Mississauga, Brampton, Oakville, Hamilton, and Milton, you want to take the necessary steps to ensure your business continues if one of your partners or investors decides to leave the business. You should talk to Beganyi Professional Corporation for the answers you need.