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Legal Tip 49: Business Succession Strategy on Death of 1 Partner

Discussion in 'Legal Issues' started by Terry_w, 5th Aug, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Business Succession Strategy on Death of 1 Partner


    Often when a partner in a business dies the business collapses.Imagine there is a business set up in a company with 2 partners A and B. The business is a restaurant and A is the manager and B is the chef. B dies and A suddenly has to start cooking and managing the restaurant until they can find a new chef. The new Chef needs a salary and this is a drain on the business as sales drop to the chaos and change in food styles. Meanwhile the spouse of B is demanding payments of dividends from the company. She also wants A to buy the shares from her. She thinks the business is worth $500,000 but sales have dropped and you think it only worth $300,000. There is a huge argument and she attempts to remove A as director.


    The whole business could collapse.


    A simple way to plan this would be for A and B to enter into a buy/sell agreement using options. The agreement entered into could have terms reflecting

    • The surviving business owner could have the right to require the deceased’s executor/administrator sell then the shares of the deceased (a call option); and

    • The executor/administrator of the deceased could require the survivor to purchase the deceased’s shares (A put option).

    This can be combined with insurance so that the survivor would not have to come up with the cash to buy the other out. It would also be good for the family of the deceased as they would not need to worry about getting paid or the business failing and this inheritance dwindling
     
    Subodh Shirodkar likes this.