Does your Business have a Will?
Most people recognise the importance of having a Will to determine how their estate is distributed when they pass. If you are self-employed, a partner or co-director, having a ‘Will’ or succession plan for your business is equally important.
Think about what may happen to your business when a key partner dies or is incapacitated. Generally, business partners are mutually dependent – each relying on the other/s for their skills, expertise and capital so the business can prosper.
The death or incapacity of a key player causes unprecedented interruption. The continuing partners need to fill a void and, unless funds are available to buy out the departing owner’s share, there is uncertainty over the future control and sustainability of the business.
Business disruption due to the death or terminal illness of a partner however, can be controlled through buy-sell insurance and an effective buy-sell agreement.
Buy-sell insurance can minimise the impact of losing a business partner by providing lump sum funding towards a partner’s share after his / her death, total and permanent disablement or in the event of trauma. The payment enables the continuing owners to acquire that partner’s share.
Without business insurance, continuing partners may be unable to fund a buy-out and be forced to wind up the business or transfer the outgoing partner’s share to an unknown party.
If a business partner dies, the business may face demands from that partner’s legal representative to freeze or sell assets to satisfy an interest claimed by the estate. The business may also be subject to the unsolicited involvement by the legal representative or family member of the deceased partner.
Buy-sell insurance and an associated buy-sell agreement prepared by a competent lawyer minimises these risks.
The buy-sell agreement incorporates the arrangements for partners to hold insurance and sets out procedures for acquiring a departing partner’s share.
The insurance and agreement work together as a business succession plan by providing the funding and process to sustain the business upon the happening of certain events. Disputes are minimised and partners can plan with certainty.
Tim Hayter, Principal, Mid West Lawyers
This information is general in nature and should not be relied upon as legal advice. Formal legal advice should be sought for your particular circumstances.
