Are you prepared for the worst?

Posted on.
By Watkins Tapsell.

Business partners are like life partners, for better or for worse, in sickness and in health. Just like ending a marriage, ending a business arrangement with your business partners can be tricky, cost you money, and even end in tears. This is particularly the case where the end of the business arrangement was unexpected or unwanted. Most business partners have not considered what would happen if they or one of their partners suddenly had to retire, quit, stop work without notice, needed money urgently, fell ill or died.

We have recently been acting for business partners where one of the partners has been diagnosed with cancer. The business arrangement needs to be brought to an end and the partner who is sick wishes to make sure that he (or his family) receives an appropriate share of the value of the business. This is a terrible time for any business to weather, but without a binding agreement that also binds each party’s successors, the business may end up with unwanted grieving shareholders who have an interest in the business.

Business arrangements should be documented. Planning for the sudden events that bring the business partnership to an end should be provided for in those agreements. Our clients did not have an agreement in place, but did have correct and appropriate insurance in place for this purpose and have relied upon trust built up over a business partnership of more than 20 years and, thankfully, the trust and insurance solved the problem.

It is not always so straightforward. We have seen matters where the death of the business partner has left the surviving partner in business with the widow and children of the deceased, and there was no insurance and so the ongoing business failed. The surviving partner could not work with the new partners, so it did not work. Agreements can cover these circumstances and provide time to pay. Where it is a death, incapacity, or trauma, appropriate insurance can also assist.

We also had a case where two partners wanted to buy-out a non-performing third partner who had no idea of what was coming. There was no agreement in place to cover such a scenario so it was left to the two partners to value the business, offer a buy-out to the third partner and find appropriate funding for that buy-out. There was heated debate over the value of the business and no agreed method for calculating it. The two partners were facing either paying over what they agreed on, shutting down the business and starting from scratch, or continuing to have a non-active shareholder receiving income and dividends the same as the performing and active shareholders, but for doing no work. We managed to negotiate a compromise, but if the owners had agreed upon a plan for separation well before the problems started (and preferably from the beginning), much of the hassle could have been avoided.

Planning business succession from the start is important to minimise tax and protect your assets. And it is complex, so it is not something that you should do on your own.

Like a divorce, there are ways to protect you and your business from these major events. One of these ways is ensuring your business is structured well. Following simple steps when starting a business can save you money, time and anxiety in the future.

We all hope for the best, but we should also plan for the worst. Separation may not be an easy topic to bring up and discuss, but it is important to ensure that your business can survive. The best advice we can give is to structure your business well at the beginning, but if you have an existing business and no separation plan, you should put one in place as soon as you can.

For further information contact the Commercial Business & Property Team.

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