This time of the partnership can be compared to the early days of a marriage. Everybody is still excited, eager to work together, and the vision of the ultimate goal is still in everyones mind. Whether there are two partners or a dozen, this generally holds true.
In most partnerships, each partner is there for a reason. Each partner has a special talent or task they are to provide for the business. Whether it is the accounting aspect, sales, design, or bidding, the fact remains each partner is unique in their personality and expertise.
The early days of the business are often filled with efforts to achieve the goal rather than build the foundation of the business. Formal agreements and business plans are often overlooked in order to get the first item produced or the first sale to occur. But, these agreements are vital to the business. They may not show their worth in the first year; however, generally their need will arise.
The documents I am referring to are the Business Plan and Buy/Sell Agreement. While many businesses become successful without a Business Plan, creating in writing the objectives of your business, identifying market competition and pitfalls, outlining the tasks and responsibilities of the staff, identifying a marketing plan, and specifying the specific financial targets of the firm will provide the map to your success. Should your firm require financing, a Business Plan will be required to document the potential success of your firm and its ability to repay the loan. There are many excellent books and software packages available to assist you in creating this plan.
The Buy/Sell Agreement is often completely overlooked, although it can be vital in the continued success of the business.
Its purpose? To identify your partners and lock-in a means through the use of a signed agreement to prevent unexpected individuals from becoming partners. The most typical occurrence is the premature death of a partner. The deceased partner generally has given through their Will their share of the firm to a spouse of other family member. All of a sudden the business has lost not only a partner but the specific tasks the partner did for the business. Now it has a new partner that may not have the same skills as their deceased partner and yet would like to be compensated in many cases in the same fashion and amount. This can be very disrupting to the business and potentially disastrous.
The Buy/Sell Agreement arranges prior to its need the sell of the shares of one partner back to the firm or to the remaining partners when specific events may occur. Death is the most often event that is planned for and in some cases, the easiest to solve. But, a disability of a partner can be just as damaging as death, and this should also be evaluated as to the need for a plan.
The Buy/Sell Plan will mandate the sell of shares of the deceased partner upon their death thus preventing a spouse or other individual from becoming a partner in the firm. For these to work effectively, the method the business is valued is important and must be maintained. This is especially true for new firms whose potential may be great but have yet to make a profit. Another key ingredient is the method to pay for the shares upon the death of a partner. Most firms do not have the cash on hand to make such a payment, and thus these agreements are generally funded by life insurance. When the death occurs, the life insurance policy is ready to pay the benefit and fund the purchase of shares.
It is important to understand these agreements can be complex and should be drafted, in my opinion, by an attorney skilled in this area of the law. It is also important that the ownership of the life insurance policies be overseen by a professional. There are a couple of accepted methods of ownership; and depending upon the structure of your firm, one may be better suited than the other.
Business partnerships should take the steps to plan for the potential death or disability of a partner. This planning will add to the potential survival of the firm should such a tragic event occur. To implement this safety valve, you will need to locate a business attorney and most likely a CFP who may also be a licensed insurance professional to assist in the planning and choice of the proper insurance product which will be the funding method. Good planning and success with your business.