Death or Disability of a Business Partner

Posted by Naomi Rosenthal on Thursday, September 9, 2010 Under: Small Business
As a small business owner running an established and successful business, you’ve invested your time and effort into creating a profitable enterprise and it has become not only your present but your future too. Many small and medium business owners come see their company as a large part of their retirement plans, anticipating to sell the business and extract value from it based on the sale of any business assets, stock or the all important “good will”.
Retirement is not the only way to exit your business. Some owners leave because they receive a good buy-out offer, some because they’ve had enough, and others may be forced to leave for financial, management or health reasons.

So what happens when your business partner is forced to leave the business because of death or injury? If there was a cost-effective way to guarantee you had the right to purchase their interest, at an agreed price, and the cash to fund it, would you want to know about it?

By creating a succession plan you can address these issues in a way that is recognised and agreed to by all parties.
Firstly, it is important to determine what you want to happen to your business in the event of death, permanent disability or trauma. These can be addressed in a buy/sell agreement that you draw up in consultation with your solicitor.
This document formally binds you and your business partner(s) to the outcome you all agree to take place in these circumstances. Would you buy out your partner’s share of the business? Would you be forced to sell the business to a third party? Are you now in business with people who make little or no contribution?
The buy/sell agreement helps you avoid some common pitfalls such as:
  • Your spouse having to join the business with little or no knowledge of it or is unable to run the  business.
  • The business has to be sold quickly as there are no funds available to purchase your share.

Next, you need to determine how you will fund the buy/sell agreement. There are several options:
  • Investment. You can establish a funding pool into which the business contributes a regular sum to build a capital base from which a pay out can be made. This is not an efficient, risk-averse or tax effective use of the business resources. Also, it takes time to build the capital base.
  • Borrowed money. The remaining business partner(s) can borrow money to purchase your share of the business. This can be a costly and inefficient way to retain the business.
  • Insurance. This is usually considered the most cost-effective and efficient way to raise sufficient capital in these circumstances.

  • Contact us today to find out whether you need a Buy/Sell Agreement and the best way to fund it.
    Phone: 02 9417 6011   Email: info@tudorinvest.com.au

    For a free copy of MLC’s “Smart Strategies for protecting business owners”
    contact us via email at  info@tudorinvest.com.au.

    In : Small Business 


    Tags: "small business" "business insurance" "buy/sell agreement" 
    Tudor Investassure Pty Ltd | ABN 74 881 211 664 | Phone: 02 9455 0655 | Fax: 02 9455 0001 | Email: info@tudorinvest.com.au
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    Professional Wealth Services Pty Ltd Australian Financial Services Licence No. 312047 ATF Professional Wealth Services Unit Trust | ABN 58 174 609 776
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