Surviving the Loss or Disability of a Business Partner
Few relationships play as important a role in life as that of a business partner. Whether a company has a single partner or many, a partner is one of a business' most valuable assets. However, a change in circumstances can quickly change that asset into a tremendous liability. Businesses that lack a proper plan can unexpectedly go out of business overnight with the sudden loss of a partner.
Be Prepared for An Unforeseen Business Exit
A stable, lasting partnership is not a guarantee that things will continue on as they have. Any number of common situations can arise, even unexpectedly, that could undermine the foundation of a partnership, and a business. Every business partnership should have a plan in place to address the following:
- Death: If a partner dies, is the business prepared to carry on without that individual? Unfortunately, the odds are high that one or more of a business' partners will die prior to retirement.
- Disability: Disability is more likely to end a business relationship than death. Consider that an accident or illness will cause 1 in 5 Americans to miss work for a year or more before they turn 65.*
Without a Plan, What Could the Future Hold?
Any number of scenarios can play out with the loss or disability of a business partner. Depending on the partner's role, the impact can be immediate: revenue could stop coming in, suppliers and creditors could refuse to extend additional credit, customers could take a wait-and-see attitude, valued employees could leave. Without an exit strategy in place, the remaining business partner(s) could be left with limited options:
- Liquidate the business: Selling assets for pennies on the dollar devalues the investment.
- Bring heirs into the business: Working with a deceased partner's spouse or child who has no knowledge of the business is not a recipe for success.
- Sell out to heirs: It's difficult to set a purchase price after the fact, and the heirs may not have the funding to purchase the business. Additionally, this option can leave surviving partners out of a job or working for the former partner's family.
- Buy out the heirs: Even with appropriate funding, establishing a purchase price after the fact is difficult and does not account for the role the deceased partner played in the success of the business.
A Buy/Sell Agreement Creates an Exit Plan
The buy/sell agreement is a legally binding contract that spells out exactly what is to happen if one of the business owners dies. It addresses the special demands on family, income, taxes, and transfer of control of business assets in each scenario. A common way to fund a buy/sell agreement is through the purchase of a life insurance policy. Life insurance can protect against financial loss due to death and can be obtained with less expense than other ways of funding a buy/sell agreement.
RDS Financial Services can help you understand the options available and help you put the necessary plan in place.
Give us a call today!