Two minute scenarios...
Clients in business partnerships need to consider the risk associated with a partner leaving the business - for whatever reason. Below are three clients we have advised. Unfortunately for two of them they came to us too late.
Remaining as a silent partner..
Clients: David was one of three working partners. When he died, his wife Susan inherited his share in the business. She asked the remaining partners if they would mind if she stayed on as a silent partner. It suited them because it meant they didn't need to fund her payout, nor would she be involved in running the business. Unfortunately she found over time that the profits reduced dramatically and she was no longer receiving a viable income from it.
Objective: The whole episode had been extremely difficult for Susan, not only financially but emotionally and she now just wanted to sell her share in the business.
Outcome: When someone wants to exit a business partnership their only option is to start negotiating with the remaining partners to buy their share or to liquidate the assets under the Partnership Act (and lose goodwill). Susan's best option was to negotiate a sale although she was not in a strong position, particularly as the business had dropped significantly in value since her husband died.
Preferred Outcome: If the partners had had a Buy Sell Agreement in place, with insurance to support it, Susan would have received full value for her share when David died, with the remaining partners receiving the equity.
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But I want my son to take my share...
Client: Greg, Max and Sam were partners in an accounting practice. They wanted to put agreements in place to cover the eventuality of one of them leaving. What we thought was to be a fairly standard meeting became problematic as Greg suddenly announced he didn't want his share to go to Max and Sam if he was to leave - he wanted his son to take over his share. This was clearly unwelcome news to the other two partners.
Objective: While Max and Sam thought Greg's son had potential they did not want to be in partnership with him. A solution was needed.
Outcome: We suggested to Max and Sam that they sign an agreement between the two of them. When Greg realised this meant he could be left with a minority share, he decided he would participate and an agreement was prepared for all three.
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The non-speaking partners ....
Client: George had operated a manufacturing business for the last 35 years and had taken on a partner, Alan about 15 years ago. Unfortunately about 5 years ago they had a falling out and had not spoken since. George came to us extremely distressed. He wanted to get out.
Objective: George wanted to extract fair value from the business, indeed he needed to, as it was to fund his retirement. Alan however did not want to buy George's share. Under the Partnership Act, George had no recourse but to wind up the partnership and force the sale of assets in the business. However whilst still functioning, the ageing equipment would not have realised enough to make it worth the effort.
Outcome: This was a distressing case all round. On the designated day our lawyer went with George to the factory and declared the partnership over. George then simply walked away.
Preferred Outcome: If George and Alan had signed an agreement back when they were talking, George could have had the option of selling his share to Alan based on a pre-agreed formula and terms.
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Helping your clients with succession planning
Business partnerships do end - the question is what will that look like when it happens? Buy Sell Agreements and Exit Agreements with appropriate funding in place, especially insurance, can provide the solution.
Whether its personal or business succession planning, if your clients are concerned about an issue give us a call. We would love to help.
If you want to extend your skills in this area, you may like to attend a Business Succession Planning or Estate Planning seminar or workshop. For more information refer here.
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