Business Partner DiedIf your business partner died, what would you do? We learned recently of the passing of Tony Hsieh, one of the driving forces behind Zappos. The other day, I wrote of the estate planning issues that Hsieh left behind (it seems they don’t believe he had a will). Along with the concerns for his estate and his sizeable fortune, he may have left behind many business issues for his business partners to deal with. As many of my clients know, 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. When you found out that your business partner died, this may not be the first thing on your mind. But it should be on your mind now.

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.

Our Business Didn’t Have a Plan

If your business partner died and you didn’t have a succession plan, you may still be covered. Although it’s a better planning practice to have a succession plan, 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.

Now, if your business partner died, you didn’t have a succession plan and you didn’t have an operating agreement for your company? Now you’ve got some work to do. It’s not necessarily the end of your company, but your company could get caught up in the estate of your business partner. Especially if you are a business that requires a license, and now a license holder is deceased, there can be some significant work that needs to be done.

Regardless of what situation you find yourself in, a succession plan for your business is a good idea, no matter what stage your business is at. From new businesses to family businesses that have spanned generations, a written plan can make sure that your business can continue to grow and thrive even after an owner dies.

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Next Steps

If you’ve been considering business planning, or this is the first you are hearing of it and would like more information, let's set up a Legal Strategy Session and we can discuss if it is the best option for your situation.

Andrew Ayers
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I work with business and estate planning clients to craft legal solutions to protect their legacies.
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