What is a partnership? A partnership is a formal agreement and a form of business where two or more people share ownership, responsibility, management, income and losses of the company. Under this, two or more people combine their resources and agree to share risks and profits. There are several tax benefits for the same as well. There are many advantages and disadvantages of a partnership, a good partnership can lead to more profits and better business ideas for growth and expansion whereas a bad partnership can lead to heavy debts, losses and bankruptcy. Sometimes when a partner leaves, you will probably have to value all the partnership assets and repay them their share of the investment and this can be costly. There is a heavy risk involved, the question is ‘how have you planned for this financially’?
Building a successful business is not easy. Keeping it successful is even harder, and coping with the elimination of a partner may be the hardest situation of all especially if the partner passes away. When that happens, your deceased partner’s share in the business usually passes to a surviving spouse, either by terms of a will or simply by default as the primary heir. That transition can pose a serious issue for your business if you haven’t prepared for it.
If this happens, One option is that the spouse or an adult child is willing and able to step up and take over the former partner’s share in your operation. You will simply need to formally take your new partner on board, and begin the process of learning how to work together. Or the second option could be to Buy out the deceased partner’s share and have the whole ownership.
Buying out your dead partner’s share can also be a thorny proposition because it raises two rather difficult questions: How do you accurately value your company, and where will the money come from?
Coming up with an accurate value for public companies is relatively easy, but with small, privately held companies it’s trickier and even after you derive a number, it may be difficult to raise these funds. You may need to borrow, but then the cost of servicing the loan becomes a burden on the company. Especially when the deceased partner’s legal heirs may ask for their share from surviving partners. In that case, the question arises as to how the firm or surviving partners can arrange for purchasing the stake from the legal heirs of the deceased partner.
A better option would be planning for such a circumstance in advance. The partners in the company can sit down and discuss this along with their financial consultant and legal team if needed. It will cost you a little fee but can save you a world of grief and a lot of money. There are various investment options which will bear the cost of such eventualities and it is wise to invest in a ‘key-persons’ coverage plan which will provide money to keep the business going and buy out a surviving spouse’s share in the event of death or disability. The objective is to buy the deceased partner’s share without disturbing the firm’s financial position.
In a worst-case scenario, if all of the business falls in exactly the wrong way, Your dead partner doesn’t leave an heir who can step up, you’re unable to find a new partner to invest in the firm, you don’t have any way to raise funds to buy out the estate’s share. If that happens, you may have no alternative but to sell off the business entirely or to close it down and sell off its assets. This is usually the very last choice because the company as a going concern is typically worth more than its desks, computers, vehicles, equipment and machinery.
Considering the personal and financial cost of establishing a business, that would be a nightmare for any entrepreneur. That risk is the strongest possible argument for addressing your need for a partnership succession plan immediately and securing each partner and the company as a whole.
Photo Credits – Andrea Piacquadio