The health and welfare of your business partner is a really important factor in your financial planning. After all, they have probably been working alongside you since you came up with the idea for your business, and also have shared the highs and lows as your business survived those difficult early years and has hopefully grown as time went on. Your partner has toiled alongside you, shared the stresses and hopefully you’ve built a business you’re both proud of. It wouldn’t have been the same, or indeed may not have happened without them.
Now I want to tell you a story about a situation we came across recently. Two business partners (let’s call them Tom and Gerry) built a great manufacturing business in the Southwest of the country. They built a great business that supported them nicely and indeed also a small team of dedicated staff. Unfortunately Gerry developed a very serious medical condition and passed away after a very short period of time. Tom was of course devastated; the 2 men had been a great team working together, very reliant on one another and sharing everything down the middle. And that included having an equal share of the value of the business. They had never felt the need to formalise the situation, they were very trusted friends to each other as well as partners.
After Gerry’s death, his son who had just finished college decided that he would (with his mother’s blessing) take his father’s place in the business, minding what was an important financial asset to them. Tom was not 100% happy with this as he now had an equal business partner again, but not the one he had built the business with. The 2 partners tried hard to make it work, however they just had very different visions for the business. In the end, after real slippage in the business and quite a bit of bad feeling creeping in between Tom and Gerry’s family, Tom managed to secure a sizeable bank loan and bought out Gerry’s family.
Tom now owns all of the (smaller business), under pressure to pay off the loan and without his friend alongside him. And all of the angst and financial pain could have been avoided… Unfortunately, such situations are repeated frequently each year around the country.
There is a range of business protection solutions available to help businesses survive the death or indeed the serious illness of someone that would result in a financial loss for a business. These solutions provide a number of benefits for businesses;
- They offer real peace of mind benefits to the directors or partners, as they remove the financial worries associated with the death or serious illness of a colleague.
- They remove the need for businesses or surviving partners to borrow money to buy out their partner’s share of the business.
- They remove the need for a surviving family member to take the deceased’s place in the business.
In the situation mentioned earlier, if Tom and Gerry had co-director’s insurance to the value of their shares in the business on each other’s lives, all the stress would have been avoided. When Gerry died, Tom’s insurance policy would have paid out, and he would have been in a position to immediately buy out Gerry’s share of the business for a fair price and keep control of it – which could have been agreed as a right for each of them when effecting the policies.
There are a number of different types of business protection solutions available to suit the different types of business structures.
This would have been the answer to Tom & Gerry’s issue! Each director insures themselves against the death of their partner, enabling them to buy out the partner’s shares on death and/or serious illness. As an alternative, the insurance can be effected by the company itself.
Similar to the above, a partnership takes out insurance, protecting itself against the death or serious illness of an individual partner, enabling them to compensate the deceased partner’s estate for their share of the partnership.
Key person insurance
This helps a business to minimise the impact of the death or serious illness of a key employee. The insurance can be used to quickly attract a replacement employee or indeed to pay off loans of the company that may have been guaranteed by the deceased.
So the good news is that Tom & Gerry’s situation can be avoided. The key to finding the right solution is getting the right advice. And that’s where we come in! If protecting the future of your business is a concern to you, please give us a call and we can walk you through the options available to you.