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Simon Says® Having the Talk With Your Business Partner

Simon Says® Having the Talk With Your Business Partner

April 09, 2021

The latest blog in our series is, “Having the Talk With Your Business Partner”. This can be a difficult and somewhat sensitive discussion, however, it has major implications that could impact you and your partner, the families of all the partners, and the people you employ, as well as others involved with your business.

So, imagine, if you will, you and your partner are entering your late fifties, sixties or perhaps even seventies. You’ve been in business together for over twenty years and have a successful, thriving company plus you’ve enjoyed a substantial income as well as the benefits of owning a small to medium size business. Everything is going well and then…disaster strikes. You get an unexpected call that your business partner has suddenly passed away. Now everything that you’ve built together with your partner is in turmoil. All at once you are faced with handling an enormous number of details that must be addressed immediately, not to mention the emotion of losing a valued friend.

To begin with you’ve just had a personal loss and so has your partner’s family. Attention has to be given to the emotional situation as well as the immediate actions that grieving families must deal with. 

Then the chaos starts for you. First of all, if you had no plan in place, you may now have a new, previously unanticipated partner, i.e., your partner’s spouse and family, who can claim ownership of your partner’s shares in the business and make decisions about the business with which you don’t agree nor be in the best interests of your business. Plus there is an additional financial drain on the business because you will need to hire someone to replace your partner’s role and also have to continue to pay a salary to your partner’s spouse. In other words, you now have a mess on your hands coupled with legal and financial matters to contend with that you did not anticipate and were not prepared for. 

Obviously this story is not unique and probably happens all too often to partners in business. This can also be a scenario in a multi-generational family-owned business, which may include inheritance issues and other tax implications. 

If you are in a business with one or more partners, no matter your ages, you should have a plan in place for eventual business sale, business break-up, business acquisition, or demise of any of the partners.

How can you protect yourself and your partner(s) from this happening to you?

Let’s review the basics.

  • A Buy-Sell Agreement – this lays out how ownership will transfer in the case of a partner’s death, disability or retirement. This agreement provides for the purchase of the departing shareholder’s stock by the company or the surviving shareholder(s).
  • Funded Life Insurance Policy – in order to have the money to buy the stock of a deceased partner’s estate, a life insurance policy is used to fund the purchase of the deceased’s shares.
  • A Business Valuation – in the event one of the partners no longer wishes to be in the business, a valuation of the business will determine the market value of the business and need to be agreed upon by all partners for a smooth transition based on the terms of the buy-sell agreement. 

According to Gary Katz, a registered representative of Lincoln Financial Advisors, a buy-sell agreement and its proper funding may achieve several goals:

  • Avoid liquidation of the business
  • Facilitate an orderly continuation of the business
  • Replace lost business income for a deceased owner’s heirs
  • Set a purchase price that can fix the estate value of the decedent’s stock
  • Provide evidence to customers and creditors of the firm’s stability

No matter what the circumstances, being prepared for a partner’s retirement, a company break-up or the death of a partner, one needs to have a plan in place of agreed upon actions that must be maintained for not only the protection and financial health of the company, but also for the financial well-being of all parties involved. 

I strongly suggest that if you are an owner of a closely held business with one or more partners or family members, and don’t have a buy-sell Agreement and funded insurance policies in place, it makes sense to have “the talk” sooner than later before anything unexpected happens.

I hope you will not consider this information as only food for thought, but rather as fuel for action.

At Simon Financial Group we help many of our clients who own businesses through this process. There are important conversations that need to be had and a substantial amount of paperwork involved. Having an objective financial advisor at the table, along with your attorney and accountant, can help make this “talk” less awkward, more productive, and more beneficial to all involved.

If you would like to have a no-obligation discussion about your business, give me a call at 888-SIMONSAYS or set up an appointment on my calendar

Saul Simon is a registered representative of Lincoln Financial Advisors.
Simon Financial Group is a marketing name for securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Lincoln Financial Advisors does not offer legal or tax advice. CRN-3535697-040621