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Let’s look at an example:

X-success (Pty) Ltd is currently valued at R15 000 000. There are two loan accounts owing to the two shareholders of R2 000 000 and R1 000 000 respectively. The valuation of the business will therefore be as follows:

Market value R15 000 000

Less: Liabilities (loan accounts) R 3 000 000

Total value R 12 000 000

From the example it is clear that if the loan account is not settled first, the value of the business will be R12 000 000 as opposed to R15 000 000. It is therefore important to make provision for both the loan accounts as well as the full market value of the business in the buy and sell agreement and underlying funding.

There is currently a debate about whether the loan account/s should be included in the buy and sell agreement and attached value of the business. It is therefore important to seek professional advice for each situation to determine what the best structure will be.

The remaining owners of a business may be faced with some challenges when a co-owner suddenly dies or becomes disabled. These include not having the resources to purchase the available shares or having to deal with a surviving spouse or family member as a new partner.

They may also be faced with an executor who interferes with the business or wants to sell the shares to the highest bidder.

1. Parties to the agreement

It is important to ensure that the real owners of the business are party to the agreement. Issues like whether all parties are selling, and in the same proportion, need to be decided upfront. Also ensure that where a trustee as representative of a Trust is involved in the agreement, the necessary resolution and power of attorney have been granted to that trustee.

3. Purchase price

This is often the most problematic aspect of the sale. Parties need to agree on what valuation method will be used for the business. There are different ways in which to value the business, including the Earning / Yield method, Net Asset Value or Price / Earnings value. Unfortunately, often the value of the business is linked to the life insurance policy taken out to buy out the deceased partner’s share. The risk with using this method is that the actual market value of the business at date of death may be substantially different from that of the policy proceeds, which will result in donations tax and a possible loss in the estate duty exemption on the buy and sell policy.

5. Termination

Termination of the agreement also needs to be specified. It is especially important that provision is made for the event of simultaneous death of all the parties to the agreement.

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