Your business is one of your larger assets, if not the largest, on your personal or your family trust’s balance sheet. It will therefore play an important part in your personal financial planning. Even more important, is to use the correct value for your business, otherwise the result of your financial planning could have the wrong outcome.
Take your buy-and-sell agreement, for example. You and your business partner contracted that the longest living will buy the first dying’s share of the business. The purchase price will be determined at the date of death of the first dying. Both of you took out insurance policies on each other’s lives. The business was valued at the time you contracted. The amount you insured one another’s lives was based on this valuation.
One of you dies 10 years later with the value of the business triple that of the value at the time you contracted. The longest living will receive the payout from the insurance policy. This payout will not be sufficient to enable the longest living to buy the first dying’s share of the business. He or she cannot simply walk away from the deal as he or she has an obligation in terms of the contract. That leaves the longest living with a serious problem which can be solved by always making sure that you use the most current valuation of your business and do an annual review of the buy and sell insurance to ensure that these amounts are aligned.
Courtesy Sanlam Business Market