Business Succession and Property

Each business will have its unique requirements.

I assisted some clients in relation to a business succession agreement for four partners in a successful business.

At the time of formation of the original business entity, there was a simple husband and wife team. Over the years, the business grew. They were joined by their management executive and they sold shares in the company as a result.

The business expanded again and they sold a further tranche of shares to another key management person.

During the expansion phase they also had the opportunity to purchase the business real property from which the business was conducted.

As it was around the time of the last manager’s buy in, he could not afford to purchase an interest in the property as well.

So the end reality was four business owners and three property owners.

They acquired the property in a separate family discretionary trust as tenants in common in one-third shares each. A commercial lease was established between the business trading entity and the three trusts as owners of the property.

All simple so far…

The question arose as to how to deal with the property interests upon death of a principal in the business.

It is a simple matter for the one that did not buy in, as it is simply the value of his interest in the shares of the trading entity. However, when it comes to the buy/sell agreement for the three that have an interest in the property, this was a completely different matter.

The issues are

  1. Does the deceased business owner need a continuing interest in the real property
  2. Is there a greater inherent value to the property in light of the commercial lease linked to the business
  3. Should the principals be able to leave the property interest to their family in their estate as a separate matter from the business
  4. Does the buy/sell agreement take account of the goodwill attached to the business premises?

These questions were more difficult to answer than I first thought. It was always a regret of the last owner to buy in that he did not acquire an interest in the property as well. It may be that this is dealt with separately and there is no requirement to sell down the interest in the property.

In the interim, a solution was reached so that the value placed upon the business had a recognition of the business premises, pursuant to the long-term lease in place with the current owners.  A simple buy/sell agreement was prepared to allow for self insurance of the principals in the business.

Further, self-owned policies were put in place for the property ownership via the family trusts. It was an issue as to how the mortgage facility was structured and the parties are considering a variation to the agreement that governs the holding of the property. I have recommended that this be included in the buy/sell agreement, to allow the continuing owner that presently does not have a share in the property, a right of first refusal to buy that interest of the departing principal.

All sorted, for now…

Article originally published in All Things Considered Digest Edition #86