How would your business survive if a business partner were to leave your business? Do you have a Partnership Agreement or Business Succession Plan?
Inevitably, all business partnerships come to an end and often it can be unexpected. It is important for business partners to put a Business Succession Plan or Partnership Agreement in place to ensure the best outcome for all business partners in the event that one or more partners were to depart the business earlier than expected.
There are two “unexpected” scenarios a business succession plan or partnership agreement must prepare for:
A business succession plan or partnership agreement addressing a Buy Sell Agreement – sometimes referred to as a "Business Will" – is a contract between business partners that sets out exactly what the rights and obligations of each partner are in the event of the involuntary departure of a partner.
An involuntary departure may occur when one or more business partners are forced to leave the business due to
Without a business succession plan or partnership agreement in place:
A Buy Sell Agreement can help provide a safeguard against these unfortunate circumstances.
It ensures that the rights of each partner are protected whilst taking into account the interests of the business itself. The partners can keep their business and the beneficiaries can be paid out.
Funding of the payout is usually by way of life insurance policies (Partnership Insurance) held by each proprietor. These insurance policies are noted in the Buy Sell Agreement as having been taken out to cover the proprietor's equity in the business.
A business succession plan or partnership agreement addressing an Exit Agreement is a contract between business partners that sets out exactly what the rights and obligations of each partner are in the event of the voluntary departure of a partner. Voluntary departure may be where a business partner chooses to leave the business, whether it is due to retirement, a disagreement or another reason.
When a business first starts, most people don’t plan for the consequences of one of the owners leaving. When this occurs, the partner who wants to leave really only has one buyer, the remaining partners. Their bargaining position can be compromised. Disagreements can occur over the value of the business. When parties are forced to negotiate in these circumstances, the playing field is inevitably not level. The business can suffer while negotiation takes place.
Issues such as the method to be used to value the business at the time of sale or purchase, possible discount to that valuation (as an incentive or disincentive) and payment terms, all need to be covered when considering the voluntary departure of an equity holder or partner.
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