One of the most important steps in setting up a business partnership is agreeing on…
What’s the Back-up Plan if Your Business Partner Died Tonight?
Many people go into business with a business partner. It can be a great way to leverage your skills, increase your profitability and extend your reach into new customer markets.
The downside is, if not managed, it can also increase your risks of losing it all.
Whether you’re in business with a family member repairing cars or you’re part of a group of professional colleagues running an accountancy firm; each business has its own particular risks and rewards that need managing. But there is one risk that is special to all partnerships.
Managing the big risk that can put you out of business overnight
When it comes to recognising the key risks that a business faces, the death of your business partner is not usually one that comes to mind, but should.
Statistically speaking the more people you have in your business structure and the greater their differences in age, the higher the risk of you facing the unexpected death or disability of a business partner.
Protecting your personal liability
Unlike a proprietary limited company where liability can usually be quarantined inside the company structure, liability in partnerships is very different.
Individuals who are in a partnership with another, just like sole traders, are personally liable for all the debts of the business.
The average age of a life insurance claim is 53. At this age many people still have financial commitments such as mortgages, car payments , school fees and business debts.
So what would happen if your business partner died tonight?
If your business partner died tonight, you’d be immediately responsible for all the business debts because business partners are said to be jointly and severally liable for the partnership’s debts.
So what’s your backup plan in case your business partner died tonight?
What happens to your share in the business will depend on a number of factors. A strong business will have a documented business partnership agreement in place. The ATO website advises, ‘A partnership agreement should outline how income or losses will be distributed to the partners and how the business will be controlled.
So what happens when your business partner dies with a partnership agreement in place?
If you both signed a written partnership agreement when starting the business, (or even shortly after reading this blog post too) it’s likely that you included a clause detailing what the outcome would be if a range of unexpected events occurred including the unexpected death or temporary or permanent disability of a partner.
The average age of a customer making a claim on a Trauma Insurance policy is 48.
A partnership agreement can include agreement ahead of time on details like:
- how the business should be valued
- will the surviving partner buyout the shares of the deceased at full market value?
- will the deceased partner’s family be automatically required to sell their share of the ownership rights back to the surviving partner or
- are they free to sell them to anyone, including a competitor.
So what happens when your business partner dies with no partnership agreement in place
If you didn’t create a written partnership agreement with your business partner, then the Partnership Act relevant to your own Australian State or Territory will determine what happens next to your business.
- Generally, upon the death or bankruptcy of one of the partners the Partnership will immediately be dissolved.
- You will become personally liable for staff entitlements if they are laid off.
- You will be responsible for the tax, GST and related.
- You will then owe your business partner’s estate a debt for their share of the partnership value.
For most people this is a disaster for the surviving partner and their family, as well as the family of the recently deceased. Much of this anguish can simply be avoidable if you put a partnership agreement in place.
Without a written backup plan to cover this eventuality, your business would probably fall apart.
There is a way to stop you losing all that you’ve worked and sacrificed for by simple advanced planning and a good strategy from your specialist business financial adviser.
Case study – The 2 partners of Red Design
Red Design Agency is a web development partnership managing websites for Local Councils in Australia. The business is currently valued at $1,000,000 and there are 2 partners Daniel, in charge of creative, and Rarj responsible for administration and sales.
RDA recently put a partnership agreement in place in case any of the partners died unexpectedly.
- They signed an agreement that each business partner would have life insurance to the value of the business’s debts and liabilities, and
- agreed the proceeds of any life insurance claim would be used to buyout the shares of the late business partner, so their surviving family would receive their share of the business value.
Unfortunately, Daniel died suddenly after his bike clipped a gutter on a corner and a subsequent head injury triggered his fatal stroke.
- The life insurance company paid out the claim value of $1,000,000 in 24 hours.
- That was then used by the surviving partner Rarj to buy back the 50% ownership rights from Daniel’s family and pay out the business debts.
- The business survived the transition and retained all its staff and key contracts.
- Rarj the surviving partner continued with the business, with no further obligations to Daniel’s heirs, and went on to win an industry award three years later for design innovation.
Both the partners families agreed that having the partnership agreement made a potentially difficult situation straightforward.
Upon reflection Rarj said, “We could have put the partnership agreement off but we thought, what’s the cost of having protection and not needing it, versus the cost of needing protection and not having it”
Agree on your backup plan with your partner
Putting a partnership agreement in place requires some tough decisions and some strong conversations. But after that’s done, your business will be a stronger better business and you’ll be free to put all your emotional focus on running the business, undistracted by the nagging question, ‘What would happen if my business partner died tonight?’
Partnership agreements and your Supply Chain Risk
Every business is part of somebody’s supply chain. How much business continuation risk is in your own supply chain? How would your business be affected if one of your main suppliers lost a key person or a business owner died overnight? What’s your expectation of their ability to manage that risk?
Many larger businesses are hesitant at contracting a smaller business because of supply chain risk and often request a ‘Capacity Statement’ that outlines the capacity of the business and its plans for business continuation in the face of known business risks.
You can download a free Capacity Statement template at our site here.
Should you ask your suppliers to complete a Capacity Statement for you?
The international B Corp., movement use supplier questionnaires to confirm the ethical treatment of staff and other supply chains risks. The international Fair Trade Certification is based upon transparency and being able to trace the originating sources in a supply chain as far as they can. Fair Trade Cotton is a great example of this standard in practice.
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