Successful business partnerships plan everything except one thing.....
Dying
As Accountants we tell every new business partnership (not mum & dad partnerships) to think about an exit strategy. We say things like, “you are both building the business now and based on your figures, skills and enthusiasm it looks like you will be very successful. But if you drift apart or want to go in different directions how will you pull it apart?”
Most partnerships ignore us. We get it.
And the really successful businesses don’t drift apart, so they didn’t need our warnings. Until one partner dies.
All of a sudden, the partnership that is going well, making good money faces a new set of questions they hadn’t really discussed properly. You see, most partnerships work on the basis that if a partner dies the remaining partner will buy out the other person’s share from their estate. And the really good businesses put insurance in place to cover that. The highly successful businesses put a partnership agreement in place to tell everyone how it will all work.
But they are still missing one thing.
What if the partnership doesn’t survive after it loses one of the partners? There is a reason a partnership is formed. When two people agree that their combined skills are better being in business together than employing people to do that work. What do they say? 1 + 1 = 3. That’s a real partnership. Take one away and sometimes the business will struggle.
1 + 1 = 3
But 3 - 1 = 0
Is this you? Here’s how to fix it.
Build in a contingency and an agreement to allow the business to trade for 12 months before buying the deceased partner’s shares. Then the remaining partner can close or sell the business and not be out of pocket.
Think about this. The business is worth $1m. Partners own 50% each. They have a number of staff and leases on the factory or office.
What does it cost to close the business, give all the staff redundancy packages, pay out long service leave and break the lease on the premises? Let’s say that costs $800k.
Instead of buying the deceased partner’s share for $500k. Each partner needs to put in $400k to close the business. In most cases the remaining partner will try to make a go of it, and some will continue to be successful. But for the one business that closes the remaining partner has paid out $500k to the partner’s estate then the full $800k to close the business. No one wants that.
If you want to check that this isn’t you. Call me and I will set up a free initial meeting with our Estate Planning coordinator.