19 November 2012

What Happens When a Business Partner Dies?

It happened to me!

If you are involved in running a small business then you will know that there are key people involved. They might be key in doing the work, finding the business, delivering what has been sold, etc.. Or they might be key in terms of the finances, perhaps as shareholders.

The statistics say that if you have three people with an average age of 50, then the probability that one will die before 65 is 32%.

So what would the impact be? Only you can know when it comes to your business but here's some possibilities... You might be unable to deliver to your customers. You might be hampered from moving on to the next stage of the business plan. You might lose some key contacts or clients which the business partner had.
 
If they were a shareholder then there is a realistic possibility that you will lose control of the business. That can happen if their shares end up passing according to their will to family; they may not be involved or interested, and they could simply sell the shares on to someone else - even a competitor - or just sit on them and do nothing, preventing you from moving forward.

Nothing is ever going to completely mitigate the loss of someone. However, there are some straightforward things you can do.

1. The Shareholder Agreement (or Partnership Agreement) could be used to specify what will happen on the death of one shareholder if no-one's that bothered (e.g. an optional "offer" to buy back shares)
 
A better option in most cases....
2. A life insurance policy could be taken out for each shareholder with the proceeds paid into a trust and used by other shareholders to purchase the deceased's shares. A "Cross Option" agreement enforces this - the shareholders must buy (using life policy proceeds), and the deceased's familiy must sell.

And my experience? My business partner of 6 years died in his 50s. Fortunately for me and others involved we had just sold the business and there were no financial implications. However, a few months earlier and the work of 6 years would have been in jeopardy. There is an alternative!

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