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..
Scenario: Daniel was one of three working partners. When he died, his wife Julia 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.
What's the issue? Unfortunately Julia found over time that the profits reduced dramatically and she was no longer receiving a viable income from it.
Solution: When someone wants to exit a business partnership often their only option is to start negotiating with the remaining partners to buy their share. Julia'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. If the partners had had a Buy Sell Agreement in place, with insurance to support it, Julia would have received full value for her share when Daniel died, with the remaining partners receiving the equity.
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But I want my son to take my share...
Scenario: Greg, Max and Sam were partners in an accounting practice. They wanted to put agreements in place to cover the possibility of one of them dying. Things became problematic when Greg advised he was leaving his share to his son.
What's the issue? This was clearly unwelcome news to the other two partners. They felt a business partner was potentially being forced on them.
Solution: It was suggested to Max and Sam that they sign an agreement between the two of them. When Greg realised this meant his estate 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....
Scenario: 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.
What's the issue? George wanted to extract fair value from the business, especially as he needed it to fund his retirement. Alan however, did not want to buy George's share. It was going to be virtually impossible for George to find someone else to buy his share.
Solution:.If George and Alan had signed an Exit 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. George ended up leaving the partnership with nothing.
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