If you own your own business, and have potential buyers, it is important to set up a buy-sell agreement while you are alive and capable of doing so. Here's how:
1. You'll need to hire a corporate lawyer who has had experience assisting business owners set up buy-sell agreements - the wording and structure need to meet Canada Revenue Agency's (CRA's) standards, especially regarding measuring the value of the company. This is because CRA stands to receive tax on any capital gains that may be triggered at any future date.
2. You and perhaps your buyer(s) will need to have your business value professionally appraised. If the value is different (it usually is), your lawyer will need to negotiate the purchase price. This will show CRA that you have done the evaluation professionally (two valuations are better).
3. Your lawyer may advise you as to what method of buy-sell agreement will work better in your case-depending whether you are a sole proprietor or corporation.
4. Determine if the company has the cash flow or a large amount of money available to fund the buy-out of the deceased or disabled owner. Permanent life insurance is generally always used to fund a buy-sell agreement as it can pay a large amount of tax-free capital at the right time-at the decease of the business owner.
5. Many larger insurers have pre-designed sample buy-sell agreements. Therefore, it is wise to have your insurance specialist present with your lawyer and the buyers' lawyers. After it is drafted, all parties will review it to their satisfaction, and then sign it to make it legal. It is suggested that the life insurance be purchased first to ensure that one is insurable. Even where there is a medical problem, in most cases, there is an insurer willing to design a policy to suit the risk, based on the respective health of the individual.
