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What to Do If Something Happens to My Business Partner

24 April 2017

What to do when a business partner dies or becomes permanently disabled

Going into business with someone else, particularly when it’s not a family member, is a big decision that shouldn’t be taken lightly.

While many people give a lot of thought to the compatibility of working together and how the business will actually operate, unfortunately not as many people consider what they would do if something happened to their business partner.

Some figures indicate that more than 90% of businesses don’t have legal documentation in place to govern what would happen in the event a business partner dies or becomes permanently incapacitated.

The good news is that with a little forward thinking and enforceable partnership agreements, a lot of unnecessary heartache and interruptions to your business can be avoided.

What can go wrong?

Unfortunately without  high quality partnership agreements and other legal documentation problems can occur that can have significant short and long-term impacts on a business and relationships with the deceased’s family.  Some of the most common problems include:

  • Life insurance set aside to effectively pay for the deceased’s share of the business could be paid to other beneficiaries and the deceased’s spouse could still seek to recover the business partner’s share in the business.
  • There may not be any insurance in place and the surviving partner may not be in a financial position to payout the deceased person’s share to his or her estate and/or find a replacement for the deceased’s role and responsibilities, resulting in possible business closure.
  • Inadequate insurance taken out. Insurance needs to not only cover the partner’s share of the value of the business but also their share of any debt that the business is carrying as well as make allowance for capital gains tax, GST and any other relevant outlays that may be applicable.
  • A surviving spouse may have different expectations about their ongoing role (if any) in the business.
  • Provisions not made for the business partner and their family in the event of temporary or permanent disability.

What can you do?

The best strategy to avoid the above problems is to plan ahead and get formal succession planning advice from a qualified legal professional.

Formal legal documentation such as a high quality partnership agreement and/or Buy/Sell Agreement will need to be developed.

Both business partners will need an up-to-date and high quality Will and estate plan that takes their business interests into account.

You should consider the following throughout this process:

  • The legal documentation clearly outlines a seamless process that will be followed, as well as any provisions to be made, in the event any one of the partners in the business should die, suffer trauma or become permanently disabled.
  • There is a defined mechanism for valuing the business in the event that a person dies or wishes to sell his share in the business.
  • A spouse isn’t left with a business they know nothing about.
  • Adequate insurance and documentation for managing that insurance is in place.
  • Taxation considerations are effectively dealt with.
  • Provisions are made to pay out any interests in the business in a timely manner.

What next?

You should consult a Wills and Estate professional who can help you formally and legally document your business succession plan and your estate planning. If something has already happened to your business partner without legal provisions in place, you can also contact us for advice.