What if your business partner died tonight?

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There's nothing quite the same as the relationship between yourself and your business partner. In fact, you probably spend more time with your partner than you do with anyone else. Ideally, your business partner is one of your greatest assets, but that same person could potentially be a liability.

How could that be? Ask yourself a few key questions: What if my partner died tonight? What would happen to our business? How would it affect our respective families? These may not be pleasant questions, but you should know the answers to them before it's too late.

"Why?" you ask. Know that the odds one of you may die prior to retirement are a lot higher than you might think.

Now, imagine what can happen to a business when a co-owner dies. The results can be, and usually are, disastrous. Conflicts of interest between the surviving owner(s) and the deceased's family are common. Based upon your partner's role in the business, ongoing business problems may develop beyond your capacity to deal with them. Suppliers may take a nervous "wait-and-see" position, creditors may become uncertain about payment and refuse to extend additional credit. Clients may back-pedal, valued employees may leave; in short, problems may compound and grow beyond your control.

Only Four Choices
So, what would you do if your business partner died tonight? You, and others left behind, have four choices:

1. Liquidate the business and distribute any remaining assets.
2. Incorporate your late-partner's heir(s) as your new associate(s).
3. Sell your part of the business to the heir(s).
4. You, and/or other partners, could buy-out the surviving heir(s) share of the business.

Most of the time, though, these options rarely work, as there will always be conflicts of interest, family issues, and monetary problems to deal with. The ideal solution should be one that gives control of the business to the surviving active owner(s). A resolution that provides fairly for the deceased's family, but that does not impose a financial burden upon the business. It should incorporate an objective means to value your partner's shares, while preventing legal wrangling and feelings of bad faith.

For most business owners, the recommended "best-choice" solution that meets all the criteria is a properly funded buy-sell agreement that spells out exactly what is to take place if one of you dies or becomes disabled.

The buy-sell concept is simple: a properly arranged and funded agreement that is a legally binding contract concisely detailing what is to take place if one of the owners dies. The document itself can be as simple or complex as desired, and can provide for virtually any contingency. It will also call for you to buy-and the heirs to sell- the deceased's share in the business, outlining the exact purchase price or provide a formula for determining the price when needed.

Funding Options
One problem remains-the buy-sell agreement is worthless without the funding to bring it to fruition. This may require hundreds of thousands, even millions, of dollars. The following are some funding options:

1. Establish a sinking fund, paying by installments. Few businesses, though, have the available resources to set aside, and the amount would be inadequate if death occurred too early.
2. Monies could be borrowed at the time of death, but few institutions will consider lending to a company where a principal owner has recently died.
3. Pay the deceased's heirs over time, buying out the partner's shares via installments. This could further damage an already financially weak company, by paying a non-existent partner's salary for the next twenty years, while receiving no value for those payments.
4. Life insurance. Cash value life insurance has proven, over time, to be the single most effective funding option; with each partner carrying appropriate insurance on the others.

The Life Insurance Advantage
The benefits of having life insurance as a buy-sell funding option include: Proceeds are delivered exactly when needed the most, providing the necessary funds for the agreement. In most instances, funds received by the beneficiary are income-tax free. Cost is minimal in comparison with other methods, and the policy holder can opt to purchase future funds with discounted dollars in the form of scheduled premium payments. Cash value accrues within the policy on a tax-advantaged basis, and should all parties involved reach retirement age, these cash values can be used for a buyout, or to supplement other retirement income.

Shawn Smith is an insurance agent with Royal & Sun Alliance. Shawn is a regular contributor to businessmatch-maker.com.