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Business succession – what are the options?

October 14th, 2021

As a business owner, you may think, what happens if my business partner dies or is permanently injured and is no longer able to work with me?

While these are morbid thoughts, the answers may surprise you.

In the case of your partner’s death, you may well find yourself in business with the deceased’s spouse. This means that you could be running a business with someone who has little knowledge of it, and possibly, no business experience at all.

Where your partner is permanently injured, unless there is an agreement to the contrary, an inability to work does not mean that your injured partner can be forced to give up their share in the business. Rather, you could be left with a business partner who can’t contribute to the business, but is unable to leave it.

But what if you are the deceased or injured partner? Most of us would like to ensure that our spouse or loved ones are adequately provided for, and in an effort to achieve that outcome, it’s not uncommon to seek to be bought out of the business should you pass away or suffer a catastrophic injury.

While the objective may be for you to sell your interest in the business to your partner at fair value, what happens if your partner cannot afford to pay you out?

The short answer is nothing. You, or your executor, will continue to hold an interest in the business and as such, may remain exposed to business liabilities which are incurred both before, and after, the time of injury or death. A less than ideal scenario.

Succession planning

How can this be avoided? Business succession planning.

Anyone who operates a business with others (whether as partners, shareholders, unit holders, lenders or in another capacity) should consider the merits of adopting a Business Succession Agreement.

Agreements of this type take many forms but one form involves each partner giving the other an option to acquire his or her interest in the business, in the event of death or total and permanent disability (“TPD”).

The options are generally supported by insurance so that in the event of death of or TPD affecting a partner, insurance money will be available to fund the “buy out” of the affected partner’s interest in the business.

Not only do agreements of this type ensure business continuity in the event of death or TPD of a partner, and that the affected partner will be paid fairly and in a lump sum for his or her interest in the business, they generate peace of mind for both partners.

Business Succession Agreements contain a myriad of traps for the unwary including unintentional tax consequences if prepared incorrectly. However, these issues can be easily overcome if the document is prepared correctly.

The team at Miller Harris Lawyers have years of experience in the preparation of agreements of this type. We welcome enquiries and questions, and if you need any further information please contact our office on 07 4036 9700.