Owning a business in partnership means all the partners need to protect their portion (equity investment) in the business to make sure the future control of the business stays with them. A forced change in ownership due to one or more of the partners suffering a motor vehicle accident, ill health or death could destabilise the business and risk its future.
Fact: Being in business with another person increases the number and type of risks you have to contend with. Being in business with two additional people increases the odds that you’ll experience an interruption to your business due to unexpected sickness or injury of one of the business partners. Remember if you’re in partnership with someone, you are also personally liable for the actions of your business partner, and they yours.
What would happen if you found yourself in business with someone else?
Suddenly finding that one of your business partners has suffered a stroke and become disabled (or died) and their shares in the company are now in control of their children means you might find yourself in business with their grieving spouse or children who might have little business acumen or who may not share the same outlook and values are yourself. The impact on your wealth and future ability to retire can be immediately at risk unless you have a plan already in place.
Insurance for this possible event means the business can continue with minimal impact, funds can be available to buy out business partners and agreements can be in place ahead of time on how to value the business and portion ownership shares to the departing owner (or their estate)
- What would happen if your business partners passed away in a motor vehicle accident?
- Would their share of your business pass directly to their spouse or current love interest?
How would you and your business partner(s) answer these questions?
- Estate planning - who holds your Power of Attorney and enduring power of Guardianship ships for the business?
- Do you have a power of attorney and an enduring guarantee documents on file that gives a trusted individual the power to act on your behalf if you’re absent or sick?
- Are you in business with another?
- Do you know the approximate value of your business?
- Do you have a document in place outlining what's been agreed to happen if one or both or more of the business partners are sick or injured and can't work?
- How long is each one entitled to continue to draw an income from the business and not work?
Jonathan and his 2 brothers story
Jonathan and his two brothers are part owners in a truck repair workshop. He is the companies CFO and his brothers manage the business. One morning Jonathan woke up with an unusual numbness in this arm but simply though he’s slept on it during the night. Within hours he was in hospital unable to move or speak. He’d suffered a mild stroke during the evening.
After the initial shock, the uncertainty of this situation soon began to concern his brothers and their families and how this situation would impact their family business. They had recently become guarantors for the business loans and with Jonathan off sick, the future looked precarious.
Doctors said that the stroke would need rehabilitation and that he would be unable to drive for the next few months until they had determined the level of his physical and mental impairment.
With Business people Protection in place, this is what happened:
- Keyperson insurance cover was in place and immediately paid the company a set amount of money to employ a contract CFO to replace Jonathan.
- Loan protection was in place and paid the company a set amount of money so the business debts were immediately reduced by a third.
- If Jonathan was expected to be off work for the long term, they had an agreement in place about long term illnesses amongst the owners and how it will be dealt with and how they would value the business in case the sick owner and their family needed to prepare for an exit.
With an effective plan in place, creditors felt secure that the business was stable and able to continue to trade successfully.
- You can read more about how Jonathan managed the risks to himself, his family and his business with his two brothers in our Free Resource downloads here.
If you’re part of a partnership or in business with other people (especially different family members) you need to clarity about these issues and how they will affect your and your family.