Whether you own your own business as a sole proprietor, a partnership, or corporation, it is important to set up a buy-sell agreement (sometimes known as a unanimous shareholders 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 while setting up buy-sell/shareholder 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 potential future buyer(s) (such as your shareholders) will need to have your business value professionally appraised from time to time-especially prior to such a transaction. If the value is different (it usually is), your lawyer will need to negotiate the purchase price among the parties involved; in most cases relative to larger companies, among the shareholders. This will show CRA that you have done the evaluation professionally (two valuations are better than one).

3. Your lawyer (along with your accountant and financial advisor) may advise you as to what method of buy-sell agreement will work best in your case—depending on the complexity of your situation.

• If you are a sole proprietor, you may not have active shareholders, but you may have a business heir, such as a family member-child or spouse, brother or sister, who works for or with you and may be interested in succeeding you and designing a financial strategy for payment to you and/or your spouse (or estate); or perhaps some form of monthly income for your retirement, or to sustain you if you became disabled. A simple agreement as to how the business will proceed, and how a change can affect any other party will probably suffice. Alternatively you (while alive) may just want to sell the business; or allow your heirs to sell or take over later. All tactics or options can be set forth in a succession agreement and/or buy-sell agreement.
• Where your business is a partnership, or corporation, a unanimous shareholder agreement allows, right from when the company or partnership is created, prescribed or optional strategies available to certain shareholders, as to how to purchase a deceased or disabled partner's shares, as well as to redistribute his or her ownership in the company. In this case, life and/or disability and/or critical illness insurance and/or key-man insurance are the best forms of creating immediate cash to fund any agreed upon buy-out, often times better than funding via a payment of dividends etc. This agreement is very important as it sets forth what-if scenarios such as: 1) What if one partner dies in a small partnership while still an owner? Does his/her spouse now become the other's partner? 2) What if one of them becomes disabled or critically ill and can't work? Does the company keep paying salary or dividends? 3) What if we reach a point where one of them wants out of the company, for whatever reason. Will the other buy the shares, and for how much? Can the one who wants out, sell shares to a third party? 4) If operating capital is low, how will any buy-out be funded? Is life insurance, key-man insurance, disability and/or critical illness insurance, now in place to protect the shareholders with immediate payment funds (depending on the circumstances) in lieu of accessing money from the business?

  Any of the above scenarios could very well end up making a former partner or several partners, now suddenly a potential buyer; thus the general term buy-sell agreement otherwise termed a “unanimous shareholder agreement”. When set up in advance, it offers pre-designed agreed-to-proceed options. The agreement protects all parties.

  Many business owners don't think of their new partner or the other shareholders as potential buyers, especially when they are young or just starting out, but they should. It may be very difficult to agree on the terms of an agreement at a later date, especially if the relationship or anyone's health has changed or eroded.

  Thus it's very important for business owners to use—as far as is practical—a buy-sell and/or unanimous shareholder agreement upon the creation of any business relationship big or small; and regularly review and update it if necessary.

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; and in some cases can allow for a growing death benefit which will more likely meet a growing capital gains liability triggered by the sale of the business. Disability insurance can also cover a caveat in the buy-sell where the owner will sell if he or she becomes disabled.

5. Many larger insurers have pre-designed sample buy-sell agreements. Therefore, it is wise to have your insurance specialist or financial advisor present with your lawyer and the buyers' lawyers. After the buy-sell agreement 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 the owner is insurable (otherwise an alternate payment plan may be necessary). 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 health of the individual.