A business partner can be as close to you as your spouse. You spend so much time together, building and running the business. Maybe your business idea was hatched over a meal with your best friend. But just like your will for your family, it’s also important to have a succession plan for your business. What happens if your business partner dies or becomes incapacitated? Will the business be able to function with them? How about you? You may be just as important (or even more important) than your business partner. For all these reasons, and more, it’s important that your business has some kind of succession plan in place.
Business Succession Plans
As with many other areas of business, if you don’t have a plan written out, then it may fall to a court to decide what happens. For some people, they make a conscious choice not to have a plan. If something happens to them, then the law can tell their business partner what to do. But most business owners choose to have their own succession plans. There are 3 commons types of plans
- Cross-Purchase Agreements
- Redemption Agreements
- Blended Agreements
A cross-purchase agreement usually requires the estate of the deceased business partner to offer their shares to the other shareholders. In a redemption agreement, the business has a mechanism in place to purchase the business interest from the deceased shareholder. And not surprisingly, a blended agreement allows for some kind of flexibility between the other two types of agreements. It may have items like a right of first refusal for the business partner’s interest.
A common question I get from my clients:
Do We Need Another Document Drafted?
You don’t necessarily need to have a separate document drawn up. It’s pretty common that your operating agreement will have provisions regarding business succession and that will be all that you need in place. But as businesses grow and families expand, some businesses will find that a separate business succession plan is helpful to make sure the business can continue after the death of a shareholder.
Next Steps
If you’ve been considering business planning, or this is the first you are hearing of it and would like more information, call my office to set up a meeting and we can discuss if it is the best option for your situation – (877) AMAYERS.
