What happens if something happens to your business partner: Planning ahead in your company
O*NO! You are running a successful company and have the good fortune to be in business with someone who shares your values and goals…but you haven’t got around to figuring out what happens if one of you were to pass away, or have to unexpectedly exit. What would happen to the day to day running of the business? Does their estate need to get paid out? Will the business need to be sold? Could you accidentally end up in business with their family members? Read on to find out more.
We’ve got Wills – doesn’t that take care of it?
A Will is a great start - but when you’re talking business structures, you’re only scratching the surface. Your Will can only deal with assets in your name as an individual. Remember asset protection? The reason your accountant probably advised you to set up your agency as a company is to make sure your business is a separate entity to you.
We control the company though – isn’t that enough?
You and your business partner probably each have shares in the company – maybe in your name as an individual, maybe in the name of another company or family trust you have an interest in. If the shares are in your personal name, these can be gifted to your nominated beneficiaries under your Will. If your business partner dies and their shares are gifted to someone else, you’re suddenly shouldering the responsibility of running the business by yourself but not benefitting from all the fruits of your labour.
And guess what? In the absence of a proper agreement in place, the executor and/or beneficiary under your business partner’s Will may be able to step into their role as an officer of the company. Suddenly the successful business ship you were steering has another co-captain who may not have had the savvy and skills – and licence – that your business partner had.
How does this apply to real estate?
If you’re running a real estate agency, maintaining proper licensing and future proofing is essential. If your old business partner was the licensee for the business and your new business partner has no licence – and no desire to be a real estate agent – you’ll have hurdles to remain compliant. It also means that you’re suddenly in bed with someone else without your consent - and it’s probably not in the best interests of the business.
You could come to an agreement with the executor and/or beneficiary of your business partner to sell your business. This obviously has drawbacks especially if you don’t want to sell or if it’s not the right to choice to sell…and it takes time.
You could come to an agreement with your business partner’s executor and/or beneficiary to buy them out of the business. But what you know to be a fair price and terms may not be what they think is fair. And you may also not be able to raise the necessary funds to buy them out and in the timeframe they want.
So what do we do?
Plan ahead. Future proof relationships. In the same way you have (hopefully) gotten your personal estate planning in order with Wills, Powers of Attorney, etc, you need to have succession planning in place for your business. With a business that has a company structure and more than one partner, this means getting a Shareholders Agreement in place.
A Shareholders Agreement reflects the agreement between you and your business partner about:-
how decisions are made about your business;
what happens if either of you suffer a temporary or permanent disability;
how a fair share price is calculated; and
what happens with the business if you or your business partner want to explore other opportunities or if either of you pass away.
Key Takeaways
If you’re not the sole shareholder and director of your company, you need to plan ahead and future proof for those unforeseen events – as well as for while the sun is shining:-
Get your personal estate planning sorted.
Sit down with your business partner and have a discussion on what you want to happen if something happens to either of you.
Document your agreement in a Shareholders Agreement.
YOUR NEXT STEPS
For more information or if you want to kickstart your succession planning for your business and yourself, get in touch with our team of legal experts - book your FREE 10 minute chat to get started today.
Boring legal stuff: This article is general information only and cannot be regarded as legal, financial or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us. PS - congratulations if you have read this far, you must love legal disclaimers or are a sucker for punishment.