Why this matters more than most owners realise

Many South African businesses rely heavily on a small number of key people. In family companies, partnerships, and closely held private companies, the owners are often the engine of the business. They hold the client relationships, the technical knowledge, the operational decisions, and the financial guarantees that keep the business moving.

When one of those owners dies unexpectedly or becomes permanently disabled, the business does not pause. Salaries still need to be paid. Suppliers still expect to be settled. Clients still expect service. And inside the boardroom, the surviving shareholders are suddenly faced with a quiet but urgent problem: What happens to the shares of the person who is no longer there?

Without a clear, funded plan, that question can quickly turn into disputes between the surviving owners and the deceased owner's family - sometimes leading to forced sales, frozen ownership, or the collapse of a perfectly profitable business. Succession planning is regularly neglected until it is too late, which is exactly why this conversation belongs on every business owner's annual review.

A practical South African example

Imagine a successful engineering firm in Gauteng owned equally by three shareholders. The business has grown steadily for fifteen years. One of the owners passes away unexpectedly in their early fifties. He leaves behind a spouse, two children, and a one-third shareholding in a business none of them have ever worked in.

The surviving owners want to continue running the business as before, ideally without an outside party at the boardroom table. The family needs cash - to settle the estate, to maintain their standard of living, and to pay any liquidity required by the executor. The business itself does not have a spare third of its capital value sitting in a bank account.

Without a properly funded buy-and-sell arrangement, this is the moment where relationships strain, valuations are disputed, and good businesses sometimes break down. With one in place, the cash is available, the agreement is clear, and the transition happens with dignity on both sides.

The risks of having no agreement in place

When a co-owned business has no buy-and-sell agreement - or has one that is outdated and unfunded - the risks tend to surface all at once, and at the worst possible moment.

• Disputes between survivors and families. Without a pre-agreed price, valuation method, and process, negotiations become emotional and adversarial.
• Frozen ownership structures. A deceased owner's shares can become locked inside an estate for months, leaving the surviving owners unable to make clean strategic decisions.
• Liquidity problems. Surviving shareholders rarely have personal cash available to buy out a one-third or one-half interest at short notice.
• Forced business sales. Where funding is not available, the family or executor may push to sell the entire business - often below its true value - to release cash.
• Operational instability. Banks, suppliers, and key clients lose confidence when ownership uncertainty drags on.
• Succession uncertainty. Staff begin to leave when no one can explain who is now in charge or where the business is heading.

Each of those elements deserves attention. Triggering events - the situations that activate the agreement - should explicitly cover death and permanent disability, and may include retirement or a desire to exit. The valuation method should be predetermined and reviewed regularly, so that no one has to negotiate value in the middle of a crisis. Purchase obligations should make it clear whether the surviving owners are obliged to buy, or have an option to buy, and on what terms.

Equally important is alignment between the agreement and the insurance cover. If the agreement says shares must be purchased at fair market value, but the policy was set up five years ago against a business valued at half its current worth, the survivors will inherit a shortfall. The agreement directs the outcome - the policy must keep pace.

For this reason, drafting and reviewing a buy-and-sell agreement is not a do-it-yourself exercise. Legal and tax professionals should be involved, working alongside a financial adviser. A poorly drafted or outdated agreement can create disputes even when insurance exists, which is the worst possible outcome - paid-up cover that fails to do the job it was meant to do.

How Buy & Sell Insurance is typically structured

At a conceptual level, the most common structure is that each shareholder takes out a policy on the life (and where relevant, the disability) of each of the other shareholders. The shareholders own the policies on each other, contribute to the premiums in proportion to the cover, and become the beneficiaries when a triggering event occurs.

When a shareholder dies, the surviving owners receive the proceeds of the policies they held on that person, and use those proceeds to purchase the affected shareholder's interest from the estate. The estate receives cash, the survivors receive the shares, and the business continues without needing to fund the buyout from its own cash reserves or external borrowing.

This is, of course, a simplified picture. Structures can vary based on shareholding patterns, the number of owners, the role of trusts, and the involvement of holding companies. Tax treatment matters, and structures should be set up and reviewed in conjunction with a tax adviser to ensure the intended outcome is achieved. The principle, however, remains the same: prepare the funding now, on calm terms, so that decisions later do not have to be made under financial pressure.

Why regular reviews are non-negotiable

A buy-and-sell arrangement is not a "set and forget" structure. Businesses change. Owners change. Values change. An agreement that was perfectly aligned five years ago may now be significantly out of step with the business it is meant to protect.

A meaningful review considers what has shifted since the last time the structure was looked at:

• Has the value of the business changed materially?
• Have new shareholders joined, or have existing shareholders exited?
• Has the business taken on new debt, new premises, or new operational risk?
• Has profitability changed - upward or downward?
• Have shareholder roles, responsibilities, or contributions changed?
• Has inflation eroded the real value of the existing cover?
• Has succession thinking evolved - perhaps a child is now involved, or an exit is being planned?

Where the agreement and the insurance no longer reflect reality, two main risks emerge. The first is underinsurance - the policy will pay out, but for less than the agreement requires the surviving owners to pay. The shortfall becomes their personal financial problem, often at the worst possible time.

The second is a mismatch between agreement and reality - for example, an outdated valuation formula that no longer reflects how the business actually generates value. As a practical guideline, buy-and-sell structures should be reviewed at least annually, and immediately after any major business change, ownership restructuring, or significant shift in the financial position of the company.

The valuation challenge no one wants to face later

One of the most contentious areas in any unprepared business transition is the question of value. What is the business actually worth? What is one shareholder's interest actually worth? Without a predetermined approach, these questions become emotionally charged after a death or disability, exactly when calm analysis is hardest.

A well-drafted buy-and-sell agreement removes most of this risk by specifying the valuation method up front. That might be a fixed amount reviewed annually, a multiple of earnings, a net asset value calculation, or a formula determined by an independent valuator at the trigger date. The point is not which method is chosen - it is that everyone has agreed to the method before anyone needs to use it.

Without that clarity, the survivors and the family can find themselves with conflicting assessments, divergent professional opinions, and a months-long stalemate. The cost of that stalemate - in legal fees, lost momentum, and damaged relationships - frequently exceeds whatever the disagreement was about in the first place.

Common mistakes business owners make

In our experience reviewing business assurance arrangements with South African owners, the same handful of mistakes appear over and over again.

How a professional business assurance review can help

A structured review is not a sales meeting. It is a methodical look at how your business would actually cope, financially and operationally, if one of its key owners were no longer there. It is the kind of work that benefits from a calm, independent perspective alongside your accountant and attorney.

In a typical engagement, an AS Brokers adviser will work through several layers with the shareholders:

• Identifying succession risks specific to your ownership structure.
• Assessing shareholder exposure in the event of death or disability.
• Evaluating funding shortfalls between existing cover and current business value.
• Reviewing the buy-and-sell agreement alongside your legal advisers.
• Checking whether policy ownership and beneficiary structures align with intent.
• Coordinating with accountants and attorneys to ensure tax and legal treatment are consistent.

The conversation may also include financial underwriting assessments, business valuation discussions, shareholder interviews, and broader continuity planning - so that the buy-and-sell structure sits properly inside the wider picture of how the business protects itself.

Common questions from business owners

A practical next step

If you co-own a business in South Africa, the most useful thing you can do this quarter is not to take out a new policy or sign a new document. It is to sit down with your fellow shareholders and ask three honest questions: Do we have a buy-and-sell agreement? When was it last reviewed? Is the funding in place to actually carry it out?

If the answer to any of those questions is uncertain - or if the last review feels like a long time ago - that, more than anything, is the signal to act. Review the shareholder arrangements. Review the business valuation. Review the succession plan. Make sure the agreement and the funding tell the same story.

An AS Brokers adviser can guide that review confidentially, alongside your existing legal and tax professionals, and help identify gaps before they ever need to be tested in real life. Insurance without a properly structured agreement may not solve the underlying succession problem - but a thoughtful, joined-up review almost always will.