Protecting Your Investment from the Unthinkable

What would happen to your business if your business partner died today?

You were best friends, started a business together, saw eye-to-eye, and worked side by side tirelessly and amicably. Then, disaster struck. Your partner died suddenly in a car accident. Now, just as suddenly, you legally owe a debt to your partner’s estate for the value of her share in the company. Worse still, you could inherit her family as business partners and co-decision makers.

Your partner’s family will be mourning and ill equipped to tackle major business decisions. Will conflicts arise with the deceased’s family regarding plans for the business? Will suppliers or customers retain their confidence in the business you have worked so hard to build? Protecting yourself, your families, and your still-growing business will be one of the most important decisions you make after the decision to start the business in the first place.

The Paperwork
Handshakes are wonderful, and perhaps you and your partner could live the rest of your lives operating your business with just a handshake. However, it is in the best interest of your business that you and your partner outline some key points well before the situation arises.

Operating Agreement
SBA.gov advises partners to write an operating such that “Any issues that could arise between partners should be able to be resolved by referring to the operating agreement that you collaborated on to create.” Although each state has a default operating agreement, a custom document will address the nuances of your business in a way that only you and your partner can.

Percentage Ownership
While it might seem nearly impossible to value a fledgling business and hash out each partner’s percentage of ownership, business partners must know where each stands. Keep accurate records of how much each partner is contributing to the business. Determine the “value” of each partner’s contribution ahead of time. Will you be contributing all the operating capital and your partner all of the expertise? How will you value each contribution? Generally, these agreed upon values will become the basis for the percentage of the business that each partner owns. Those values also will be used to determine buy-outs and how best to protect your business if one of you dies.

Buy-Sell Agreement
If one partner dies or wants to leave the company, a buy-sell agreement will establish the manner in which a partner’s interest is determined and how much the other partner must pay to purchase that share of the partnership. Such an agreement will also be beneficial if the event a partner dies.

Attorney Abraham Benhayoun of The Florida Business Law Firm, P.A. in Miami, Florida recommends partners create a shareholder’s agreement with their business partner in which “you outline how much you think your share is worth, and agree that upon death the other owner has the right to purchase the deceased owner’s share at that price.” Then each partner “purchases term life insurance on the other owner’s life, so that if they die first, the other will have the money to buy the shares.” In this way, the surviving owner does not have to deal with the deceased’s family, and the deceased’s family receives compensation for the value of their family member’s stake in the company.

Julie Busha, CEO of Slawsa, has personal experience with both the buy-out process and protecting her business. Busha, a veteran of Season 5 of ABC’s Shark Tank, provided an ideal answer when Shark Tank’s Kevin O’Leary asked her what would happen to her business if she “got hit by a bus.” By the time she arrived on Shark Tank, Busha had already navigated a buy-out without benefit of a previously negotiated exit-plan, and she was a solo-preneur with the weight of the company resting on her shoulders. Busha shocked the Shark Tank crew when she suggested key-man insurance, a term life insurance policy, to cover her value to the business should something happen to her, but her advice was spot-on.

The Right Protection
Particularly for start-ups, term life insurance might seem like an unnecessary expense, but for a minimal annual premium, partners can protect themselves and their business should unfortunate circumstances arise. Lacking the appropriate coverage and advance agreements, if your partner dies, your business outlook might be bleak. You could liquidate the business to pay your partner’s family for her share of the business, but then what will you rely upon for income? Would you like to become business partners with your partner’s family or sell out your interest in the business to them? Will they operate the business, as you and your partner did?

Seek Legal Counsel
If failure to plan has led to a banquet of complex issues that are detracting from your primary goal—running your business—obtain legal representation immediately. It is not too late. Do not attempt to negotiate alone when emotions are likely running high. Let cooler heads prevail.