Partnership Agreements

Partnership Agreements

 What would happen to your business if a business partner died suddenly or was disabled for life?

Why a buy-sell agreement is essential

If you do not have a buy-sell agreement at present, consider the consequences in the event that a co-owner passes away prematurely. The co-owner’s business interest will pass to one or more of the person’s heirs, quite often the spouse. The remaining business owner or owners would then have five options:

Keep the heirs in the business: This arrangement carries the risk of heirs having new ideas about operating the business that conflict with those of the other co-owners.

Take on an outside buyer: First of all, finding an outside buyer for a closely held business is difficult, and you also run the risk of taking on a co-owner whose business vision ends up conflicting with that of the original co-owners.

Sell to heirs: This option does occur, but many factors must fall perfectly into place: current owners must have reason to sell, heirs must be qualified to run the business, and heirs must have enough capital to acquire all co-owners’ business interest.

Sell or liquidate the business: Most often this option is a last resort. Selling the business to a third party can result in realizing considerably less than the company’s genuine value, and liquidation proceeds can be largely absorbed by tax and other estate costs.

Buy out the heirs: In the vast majority of cases, buying out the heirs is the most desirable option. This way, the remaining co-owners are free to operate the business as they have been doing successfully for years.

Of course the preferred method in most cases is the final option – buying out the heirs. But to make that option a possibility you must put together an agreed-upon plan, which is the buy-sell agreement. Otherwise, you could find yourself entertaining one of the less desirable options.

Through the use of Life and Total and Permanent Disability Insurance in a Buy/Sell Agreement, Business partners can insure each other to facilitate a smooth transfer of ownership to the surviving partner if one partner should die prematurely or become totally disabled. This ensures funds are available to buy out heirs and a smooth transition of ownership occurs.