Planned and unplanned exits
Some exits are planned. A partner decides to retire, move abroad or start something new, and the owners have time to agree a price and a way to pay it. Others arrive without warning, through death or serious illness, when nobody has the cash ready and emotions are running high.
The two need different solutions. A planned exit is a negotiation. An unplanned one needs the money and the legal terms in place beforehand, because there will be no time to arrange them later. Thinking about both now gives you a plan for each.
Funding a planned buyout
For a planned exit, owners usually pay from a mix of their own savings, company profits and business borrowing. Some agree to pay the leaving partner in instalments over several years, which spreads the cost but keeps them financially tied to the business for a while.
In a limited company, the company itself may buy back the shares, subject to company law rules. Each route has tax consequences for both the buyer and the seller, so take advice from your accountant and solicitor early, ideally before the leaving partner names a date.
- Personal savings of the continuing owners
- Retained profits or a company share buyback
- A business loan secured on the company
- Deferred payments to the departing partner
Where insurance fits
Insurance cannot pay for a retirement. It can fund a buyout when a partner dies or becomes seriously ill. Shareholder protection for a company, or partnership protection for a partnership or LLP, gives the continuing owners a lump sum equal to the value of the share, usually through a business trust.
A cross-option agreement sets out the deal, so the estate or ill partner and the remaining owners know what happens. Many owners also add critical illness cover, so a partner who cannot carry on has a way to sell. With both in place, the family receives a fair price in cash and the business stays with the people running it.
Agree the terms before anyone needs them
Most buyout disputes come down to price and timing. If the owners have agreed a valuation method, a time limit for completing the sale and how payment will work, there is far less room to argue when the moment comes.
Put those terms in writing while everyone is well and on good terms. For a company, they usually go into a shareholder agreement. For a partnership or LLP, they belong in the deed or members' agreement. A solicitor should draft them so they fit with any insurance and trusts you hold.
How Hi Tomorrow helps you plan a buyout
We focus on the part insurance can solve. We look at how your business is owned, what each share is worth and the health of each owner, then suggest cover that would fund a buyout on death or serious illness. We set up the trusts and compare the insurers on our panel.
For planned exits, we can point out where existing policies need to change when a partner leaves, such as cancelling or transferring their cover. We work alongside your solicitor and accountant, who handle the legal agreement and the tax.