Smart Investor Malaysia

How A Buy-Sell Agreement Can Help Business Partners In The Future


The following story is based on an actual series of events, with some names and circumstances fictionalised. Any similarity to any person’s name, character, or history is coincidental and unintentional. Business partners normally do well when the relationship and business are good, but what happens when either one passes away? This is how a buy-sell agreement can help all parties involved.

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Teh and Fong have had a successful joint venture called Advanced Computing Machines Sdn Bhd (ACM), distributing computers and accessories throughout Malaysia. Each had an equal share of 50% in ACM.

Teh and Fong had been classmates since primary school and had a closer relationship with each other than with their siblings. They started the business in 1980 when the market was still new. Desktop computers were clunky, and laptops were unheard of.

The entry of the ACM joint venture was based on their shared conviction that the market for desktop computers would be big as such machines became popular among corporations.

As the manufacturing cost of computers came down, the market soon developed into a very competitive one. Fortunately, ACM, one of the early players, had a significant market share and could survive on razor-thin margins because of economies of scale and good teamwork between Teh and Fong.

Teh excelled in marketing, and Fong was a strong operations man. The two blended well and grew market share successfully. Profit grew to exceed RM10 million on an RM900 million turnover.

By 2000, ACM converted into a Berhad and became listed on the Malaysian Stock Exchange. Teh brought in his son as his assistant, and Fong’s son joined shortly after as the company accountant. Their thoughts then were for their sons to be joint successors to the business.

Over time, however, it became clear to Teh and Fong that the two sons did not get along. They often complained about each other to their father. The animosity between them grew, basically stemming from a lack of trust. Fong’s son, being a typical accountant, was always eager to check on business development expenses, while Teh’s son resented his constant querying.

One day, Teh expressed his concern to Fong over a golf session. They both acknowledged that it would be a disaster for the business if both sons were to inherit what they owned. They decided to seek advice from me, whom they both knew as an investment banker for over a decade.

After a few pleasantries, they met me over lunch and brought up the subject of their concern.

Read: Money Caused Breakup Among Four Close Friends, That’s Why it Is Important To Plan For The Succession Of A Business

Buy-Sell Agreement As An Alternative

Teh started by asking: “Jo, as you know, we have equal shares in AMC that you helped bring to IPO, and we are concerned that if one of us dies, the share in the business will go to our family and disrupt the business.”

Fong added: “The big worry is that our sons don’t get along. Sooner or later, there will be a fight, and the business will go downhill. Is there anything we can do besides leaving our assets in a will?”

I said: “Yes. There are two routes you can choose from. One is to sell the shares wholly or by a majority to a party interested in further developing the business. The second is to sign a buy-sell agreement between you so that when you die or become mentally incapacitated, your representative can sell to the other at a pre-agreed price or price-fixing formula.”

“But what if our successor refuses to honour the buy-sell agreement?” Teh asked.

I replied: “This is where it would be useful to do this buy-sell agreement with an independent trust company to act as your attorney. The trust company can then enforce the provisions you have agreed to and ensure the sale proceeds go to the beneficiaries.”

“What if my family does not have enough cash to buy?” asked Fong.

“Two ways. The first way is you can agree beforehand on payment in instalments. Or second way, as commonly done, both of you can buy insurance for a sufficient value to cover the shares to be purchased when the time comes.” I said. “For the process and the tax implications, consult an experienced trust company,” I added.

Shortly after, the buy-sell agreement and two insurance policies were put in place with the help of the trust company.

Read: He Had Everything But Children’s Harmony In The Family Business

Buy-Sell Agreement Put Into Action

In 2020, Teh died from Covid-19 infection, and the trust company claimed the insurance proceeds, which were paid to the beneficiaries, and his shares were transferred to Fong.

This was a happy ending for everyone involved, avoiding conflict and hardship for the next of kin. This is a good example of how a buy-sell agreement manages to help.

Read: The Amazing Reconciliation Of Father And Son, And This Reflected Inside The Will

About Rockwills International Group

Rockwills International Group, now in its 28th year, pioneered professional will writing in 1995 and has since evolved into the leading estate planning specialist in the country. It is today the largest provider of solutions and support services in trusts, succession, management and distribution of wealth. It has shareholders’ funds exceeding RM50 million. It has done over 280,000 wills and 15,000 trusts and holds more than RM25 billion in assets under trust.

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