Business Succession – My New Business Partner

When starting a business the last thing that many new business owners give consideration to, or sufficient consideration to, is what will happen in the future when the new business owner or an existing joint business owner either wants to exit the business or, through death, illness or disablement, is forced to exit the business.

A recent Succession Report prepared by Pitcher Partners in conjunction with Swinburne University revealed that 51% of business owners do not have a business succession plan in place.

An important part of any business succession planning is putting in place as early as possible an agreement between the business owners setting out an agreed process for what is to happen when one of the business owners wishes (or is forced) to exit the business and, importantly, what is to happen to that business owner’s interests in the business.

Can’t I give my interest in a business to someone else in my Will?

Business owners are in many instances able to bequeath or gift their business interests to someone of their choice under a Will.

However, this method of business succession has a number of pitfalls, the most significant of which is that it may well leave the surviving business owners in a business arrangement with a person or persons with whom they are not familiar and with whom they may not wish to have an ongoing business relationship.

For this reason it is important for businesses to have an agreed business succession plan in place. A commonly used way of achieving this is through the use of a Buy/Sell Agreement.

A Buy/Sell Agreement will take precedence over the Will because the deceased’s business interests will be transferred in accordance with the Buy/Sell Agreement and will not form part of the deceased’s estate.

What is a Buy/Sell Agreement?

A Buy/Sell Agreement is in effect part of a business succession plan. It is a contract that provides for the future payout or sale of a business owner’s interests to his or her business partner(s) on the happening of certain events. Typically these events include such things as the disablement or death of one of the business owners. A Buy/Sell Agreement will also often set out an agreed mechanism for the succession of one business owner’s interest in the business to the remaining owners of the business or to a third party.

Buy/Sell Agreements are also frequently linked to insurance policies which are put in place where a trigger event will (or is likely to) have a significant financial impact on the business.

If you own a business and you’re concerned about how the death, disablement or retirement of one of your business partners may have on the operation of your business, then a Buy/Sell Agreement can assist you. Not only does it allow you to purchase your business partner’s share if any of these things trigger events were to happen, but it can also help you avoid your ex-business partner’s spouse or children moving into your business.

However, business owners must seek competent accounting advice in relation to any capital gains tax implications before entering into a Buy/Sell Agreement.

Are all Buy/Sell Agreements the same?

Standard-form legal documents written with generic terms and conditions often do not take into account the particular circumstances in a given case and therefore risk being ineffective in the particular circumstances and are often unclear and confusing.

In particular, the risk with standard-form Buy/Sell Agreements is that the document:

1.will not be prepared for your particular  business with all of its unique circumstances and your specific needs; and

  1. may in the end be found to be legally unenforceable making the whole exercise a waste of time and money.

Therefore, it is advisable, and makes commercial sense,  to have a Buy/Sell Agreement prepared specifically for your personal and business circumstances by a lawyer experienced in preparing such documents.

What are the main advantages of having a Buy/Sell Agreement?

Buy/Sell Agreements:

  1. provide certainty for the business owners by reducing the risk of succession disputes;
  2. reduce the risk of the transfer of an outgoing owner’s interest in the business being undervalued with devastating financial consequences;
  3. reduce the risk of the business suffering significant financial loss , or even having to be wound up, because no agreed mechanism is in place to deal with business succession thereby resulting in all the business owners suffering financial harm.

There are many good reasons to have a current business succession plan in place for your business and to include a carefully and properly prepared Buy/Sell Agreement as part of that business succession plan.

PLEASE CONTACT

Contact Les Buchbinder at lbuchbinder@bbvlegal.com.au if you wish to discuss this matter or your estate planning objectives further.

Landlords – Back to Basics

The starting point for all Landlords should be ensuring that they have an appropriate and well drafted lease for their commercial premise. It is a crucial step for Landlords as a poor lease or a bad leasing decision can be a costly mistake. The lease is central to the goodwill, value and future sale of a business.  A well drafted lease can avoid or assist the Landlord in resolving disputes that they may have in the future with tenants.

In Western Australia, the Commercial Tenancy (Retail Shops) Agreements Act 1985regulates many retail shop leases. Landlords should understand their rights and obligations in relation to the lease and what procedures to follow in the event of any disputes.

In October 2015, the commercial leasing vacancy rate in the Perth CBD was 19.6%. This figure was expected to grow in early 2016 as final completions of new developments came onto the market and leasing space that was taken up during the boom, was handed back as businesses have downsized.

At its meeting today, the Reserve Bank of Australia’s Board decided to leave the cash rate unchanged at 2.0 per cent. The reasoning behind the decision was that recent information suggested the global economy is continuing to grow, though at a slightly lower pace than expected. This is the ninth month in a row that Australia’s official interest rate has remained unchanged at a record low 2 per cent.

The ramifications for Landlord’s entering into a bad or hastily drawn lease in this current climate is that they may find that they have an invalid lease or they may experience significant disputes and as well as potential litigation in later years as a result. When interest rates do start to rise in the coming years, we are likely to see a large number of disputes concerning rent reviews.

Legal and commercial advice should therefore be obtained before:

  • making any commitments to lease, take on an assignment or incur any other obligations;
  • signing an offer to lease or any other lease related document;
  • payment/receipt of any deposit or other monies; or
  • occupying the leased premises.

If you are a Landlord looking to lease in this competitive market, you should begin by considering your leasing requirements with the main goal to develop a profitable business. Once you have identified your leasing requirements (i.e. the lease term, annual rent, rent reviews, etc) you must then seek to include as many of these requirements as possible when negotiating the terms of a new lease or the renewal of a lease with the tenant.

PLEASE CONTACT

Contact Les Buchbinder at lbuchbinder@bbvlegal.com.au if you wish to discuss this matter or your estate planning objectives further.

Insurance Checklist

by Leslie Buchbinder
Builders’ Choice Magazine, December 2014

Builders and building subcontractors are exposed to many risks which, if not properly managed, can lead to financial ruin.

Builders and building subcontractors are exposed to many risks which, if not properly managed, can lead to financial ruin. These include risks under the terms of building contracts or subcontract agreements, as well as exposure under various pieces of legislation such as under the Workers Compensation and Injury Management Act 1981 and the Occupational Safety and Health Act 1984. There is also potential exposure under general laws such as negligence and breach of contract.

One useful management tool to have in place is appropriate and adequate insurance cover. However, not every risk can be insured against; insured against adequately, or insured against for a price that is acceptable to the builder or building contractor.

It is important that the builder or building contractor clearly understands the extent of the insurance contract before the contractual terms are finalised in order to avoid circumstances where the wrong assumptions have been made as to what risk is covered by the insurance policy and which party must accept responsibility for that risk. In a climate where insurance premiums are increasing, and more and more exclusion clauses are being inserted into building contracts and insurance policies, this is even more so the case.

Insurance checklist

When deciding how best to deal with a particular risk, you may find it useful to consider the following:

  1. Is the risk concerned insurable? Can a policy of insurance be procured which will specifically cover this risk?

  2. Is the insurance cover adequate? If a policy is obtained will it respond to the risk that has been identified and will it do so to the fullest extent of that risk?

  3. Does the cost of obtaining the insurance outweigh the risk?

  4. What is the nature of the policy and for how long will that policy provide cover?

  5. Can the policy wording be amended to specifically provide for the risk at hand or is it to be generic in nature only?

  6. Is the insurer likely to remain in business for the duration of the construction project?

Insurance disputes

Having the appropriate insurance cover does not necessarily avoid disputes arising. Issues can arise in relation to the insurance cover itself and whether or not a builder or a building contractor is protected by that insurance cover in any given circumstance.

What happens if you need to submit a claim to an insurance company? In the case of smaller and more straightforward matters, the claim may be adequately submitted by the builder or building contractor directly.

However, for larger and more complex claims, or where issues arise as to whether or not the insurer will extend indemnity to the builder or building contractor, legal advice can make a significant difference as to whether or not the claim will be ultimately accepted. Sometimes the wording of the claim submitted becomes extremely important.

Claims may be declined by an insurer for a variety of reasons. For example, in the case of a claim for storm damage, an insurer may attempt to decline the claim on the basis that gutters were blocked by roof debris and argue that this is evidence that the building was poorly kept and not properly maintained as required under the terms of the policy of insurance.

Building claims are often denied by insurers because of issues associated with defects.They may be inherent defects or defects which develop in a building over the years and fail to be considered separately from any compulsory insurance requirements.

Being declined by an insurer is not the end of the road

That decision may be the subject of internal dispute resolution pursuant to the insurer’s nominated procedures and from there the matter can be escalated further and ultimately, if necessary, to litigation. However, prior to reaching the stage of litigation there are often opportunities to seek to resolve the dispute quickly and less expensively.

Insurance is a key element of risk management – but policies must be properly considered, drafted and managed. Once any level of complexity is involved, taking legal advice is highly advisable, both in structuring insurance policies and when making claims. BC

PLEASE CONTACT

Bowen Buchbinder Vilensky Lawyers: (08) 9325 9644 or bbvlegal.com.au

5 Things Everyone in the Building Industry Should Know about the Property Securities Register

– Builder’s Choice Magazine

 The Personal Property Securities Register (PPSR) is a national online database  which electronically manages and stores information regarding security interests over any personal property apart from real estate. On the register, anentity granting a security interest is the ‘grantor’, the entity getting the security interest is the ‘secured party’ and secured personal property is known as ‘collateral’.

5 Things Everyone in the Building Industry Should Know about the Personal Property Securities Register

By:Craig Hollett (Director, Bowen Buchbinder Vilensky) and Darryl Koh (Solicitor, Bowen Buchbinder Vilensky)

Introduction

The Personal Property Securities Register (PPSR) is a national online database  which electronically manages and stores information regarding security interests over any personal property apart from real estate. On the register, anentity granting a security interest is the ‘grantor’, the entity getting the security interest is the ‘secured party’ and secured personal property is known as ‘collateral’.

1. What is a security interest?

This is an interest in personal property provided for by an arrangement which secures payment or performance of an obligation. Alwaysconsider if a security interest should be registered on the PPSR. It may not be worthwhile if the personal property is below a certain value, or cannot be easily identified, for example, if it does not contain a serial number.

2.What are typical registrable security interests?

These can arise from a variety of arrangements: contained in commercial agreements such as in building or construction contracts e.g.:

(a) a principal  entitled to take possession of a contractor’s equipment to complete any outstanding work and sell the equipment to recover any amounts owing to the principal by the contractor;

(b) the supply of equipment whereby title is retained until the equipment is paid up. This is called a ‘purchase money security interest’ (or PMSI);

(c) where there is a ‘PPS lease’ (also a form of PMSI) of equipment –  an arrangement whereby you have possession of certain equipment for a defined period of time but do not actually own the equipment, e.g. a contractor leasing equipment from a supplier.  For a PPS lease, the lease period must be more than one year or indefinite. If the equipment is an aircraft, motor vehicle or a watercraft, the time period is 90 days.

3. Why is it important to register security interests?

The consequences of not protecting one’s security interests can be dire. For instance, if you lease equipment to a contractor but fail to register your security interest, and the contractor grants its bank an interest over all its assets and later becomes insolvent, then the bank may be entitled to claim those assets without having to consider your interests over those assets.Where there are two or more security interests registered over the same collateral, priority is determined by the timing of the registration, subject to the special priorities for PMSIs.

4. The special priorities for PMSIs

If registered in time, a PMSI has super-priority and leapfrogs ahead of any other existing registrations on the same collateral e.g. if a contractor has already granted a security interest to a bank over all of its existing and future assets, the lessor will still maintain priority over those assets that are being leased out to the contractor even though the lessor may have registered its security interests at a later time than the bank.

5. By when must a security interest be registered?

Generally, where the grantor is a company, the security interest has to be registered within 20 business days after the agreement giving rise to the security interest came into force.

The table below summarises when PMSIs should be registered otherwise a secured party will not benefit from the PMSI super-priority(although the default priority rules will still apply).The term ‘inventory’ refers to personal property used in the ordinary course of business eg. stock stored for the purposes of future sale or supply. ‘Goods’ refers to any tangible personal property.

Type of collateral

​When PMSI must be registered

Collateral is inventory

​If goods – before the grantor obtains possession of the goods 

If not goods – before the security interest attaches to the inventory 

​Collateral is personal property, other than inventory

​If goods – within 15 business days after the grantor obtains possession of the goods 

If not goods – within 15 business days after the security interest attaches to the personal property 

 Conclusion

When buying equipment, it is prudent to first do a PPSR search to check if there are any secured interests over it. When leasing out equipment to someone else, protect your interests in that equipment by way of PPSR registration bearing in mind the time limits for registration.

As always, if you are in doubt with regards to any aspects of the PPSRor the protection of your interests, you should seek competent legal advice as soon as possible.

PLEASE CONTACT

Bowen Buchbinder Vilensky Lawyers: (08) 9325 9644 or bbvlegal.com.au