Does Your Business Have a Plan?

For many partners and small business owners, there is no governing document which dictates what happens when one of the partners wants to sell his interest, becomes ill, starts losing their mental faculties and/or passes away while still employed. How would you handle these issues if it happened to you or your partner? Could your business survive? Would it survive? Would the last interaction between you and your partners be a fight? Would the last interaction between your (surviving) spouse and your partners be a lawsuit?

These and other issues are the genesis behind a Shareholder’s Agreement or some form of governing document that will dictate when one partner can buy another out, when one partner must buy the other out and what happens if one partner dies or becomes incapacitated.[1] business-partnership-clip-art-464581

Oftentimes you hear about a small business closing because of the death of a partner. Most immediately think this happens because of “death taxes” which have gotten a lot of media hype. More often than not, the closure of a small business has to do with the failure to plan for the succession of the business. There can be a problem between partners of the same generation (whether related or not) if there is no plan in place. No document is a guarantee against any eventuality, but having things spelled out in advance before there is a problem and/or an issue, and while the partners each have their mental faculties and are capable, is critical. Believing or trying to persuade yourself that everything will work out because we “trust each other” or the answers are obvious as to what has to happen is fool’s gold. Remember that “desperate people do desperate things.” When faced with a difficult medical diagnosis, your one-time partner (and/or relative) may be in a different situation than if the two of you had purchased life insurance and set out on a succession plan that allowed for each of you to buy the other out in a structured, agreed-upon fashion. Our law firm has been around for 95 years, and, during that time, we have had to buy out partners due to retirement, departure, disability and death. It is extremely important to have the proper agreement in place so you have a system and a process in place and everyone knows what has been agreed to in advance. That way, when the time comes, the individual with the difficult diagnosis and/or the surviving spouse will know exactly what to expect. It is an extremely stressful time for everyone. That stress can be lessened (or not otherwise increased) by the fact that there is a documented process everyone can follow. Upon a triggering event, there is no need for a discussion, negotiation or lawsuit over it.

For those that fail to follow this process and/or implement a game plan for these issues, it often turns into a fight and/or at least an uncomfortable situation, often leads to animosity and sometimes a lawsuit. It’s not always easy to work through all of the issues that should be addressed in such a document, but it is much better to work through them in advance of such problems when everybody is comfortable, competent and willing, before any problem arises, and, most especially, when you do not know which partner will have an issue. What may be an awkward discussion now becomes an impossible discussion if you haven’t planned for it.

If you and/or your business partners are interested in formulating a succession plan and/or drafting a document that will govern contingencies and eventualities that may allow you to stay in business and continue forward even in the face of a disability or death of one of the partners/shareholders, please feel free to call an attorney at Timoney Knox, LLP .

[1] The terms partner and shareholder are used interchangeably here – “partner” applies to a partnership and/or an LLC treated as a partnership, and “shareholder” applies to a corporation and may apply to an LLC taxed as a corporation.