Running a business with others whether through a company, trust or partnership is not something that many people step into lightly. Most get to know their business partners for months or years before they go into business, building trust, rapport and structure around them as they go.
So it makes sense that many partnerships are now insuring against the unexpected exit of a partner from the business with Buy/Sell insurance that allows
remaining stakeholders to buy a partner out in the event of specific events like death and disability.
It is an important element of succession planning in partnerships, where individuals rely on each other to run their business and deliver their services or products to the market.
Take for instance the business run by Mark, Jeff and Drew, partners in a firm that sold high profile residential property. The real estate agency had a premium referral based clientele and a superb reputation that enabled them to live a good life. Despite their success, the partners had never taken the time out to build a succession plan, put business agreements or insurances in place.
Sadly, Jeff’s lifestyle got the better of him, and he died suddenly and unexpectedly from a heart attack. His wife, Kathy, who had never really been interested in the business since she left to have children 10 years ago decided return to work again, demanding to be treated like and equal partner by the other two as she was a beneficiary of Jeff’s 33% shareholding.
It soon became obvious to Mark and Drew that Kathy was out of her depth. Clients who had previously worked with the agency were complaining, two of their best staff resigned and the agency was denied an important regional contract they had held for 12 years.
The hostility and resentment between Kathy and Mark and Drew grew to the point where Lawyers became their best way of communicating.
The situation was stressful for everyone in the office, and it had virtually destroyed the value of their once buoyant and successful business to the point where it was virtually worthless. When one of the senior staff left and set up an agency down the road in competition with them, they knew their run was over.
Had Mark, Jeff and Drew sought advice on succession planning their partnership and implemented buy/sell agreements and insurance this situation could have been avoided altogether. When Jeff died, funding would have immediately triggered to buy Jeff’s ownership share from his estate. The inclusion of staff incentives schemes in their succession plans may also have kept staff in the business, minimizing the risk of them setting up in competition with the firm.
Are you in a business with others? What should you do?
- Seek professional advice to draft a buy/sell agreement
- Put in place buy/sell insurance
- Draw up an effective succession plan that take into consideration sudden and planned exits
- Ensure your buy/sell agreement is regularly revised and amended as circumstances change.
