You spend much time together, and share the burden of difficult decision making. But it’s not your spouse – it’s your business partner. Your business partner is a tremendous asset to your company. So, how do you protect your business in the event of your business partner’s death? Planning ahead for this scenario may be one of the most important things you do as a business owner.
The death of your business partner can affect more areas of your business than you anticipate. You might be prepared to have conflict between your concerns and those of the deceased’s family. But you should also be prepared for problems such as suppliers wanting to back off; creditors requesting payments and refusing to extend additional credit; customers being afraid to do business; and maybe even some employees leaving your company.
It is beneficial to explore what choices you have should your business partner suddenly pass away. One of the first choices you consider may be to liquidate the business and distribute the assets. The obvious problem with this plan is that you are eliminating your own source of income! Furthermore, the assets of the business may sell for a small percentage of their worth.
A second option would be to take on the deceased’s heirs as your new business partner(s). The problem with this plan is that often it was the special relationship you had with your associate that made the business work. Replicating the chemistry, skill set, and perspective you shared with your business partner is unlikely to happen with their heirs.
A third option for the future of your business would be to sell your share to the deceased’s heirs. However, this option is usually not viable, as the disagreements begin with the purchase price and continue through the rest of the negotiations.
Finally, you could buy out the surviving heirs and maintain the business on your own. This might be the most desirable to you, but again, you will be subject to disagreements over purchase price and other terms. Plus, you will have to come up with the money to purchase the other half of the business.
So, what is the ideal solution? A properly funded buy-sell agreement. A buy-sell agreement is a legally binding contract which dictates exactly what will happen if one of the business partners dies or becomes disabled. You can make all the decisions ahead of time, so both you and your business partner can make the decisions for the future of your business. The contract can be as simple or complex as it needs to be, but most importantly, it will either set a purchase price or provide a formula that will be used to value the business in case of a buy-out.
The death of your business partner and friend will be a difficult time for you and their family. Having to negotiate the future of your business at such a difficult time can be avoided by having a buy-sell agreement already in place. With this agreement, you can provide fairly and adequately for the deceased’s family members, value the deceased partner’s share of the business, avoid placing a financial burden on the business, and prevent bad feelings between the parties. Consult an attorney or financial advisor to talk about planning for the future of your business, before it becomes a greater burden at an already difficult time.
