In the energetic flow of running a business, planning for unintended succession often takes a back seat. However, preparing for unforeseen illness or death is vital to avoid potentially destructive consequences to your family, fellow partners, and the business itself. It's something every partner should plan for now to ensure a secure future.
If you don’t have the right plans in place, you could find your business suddenly ceasing to exist. If your business partner dies and you don't have an adequate partnership agreement in place, their assets will become probate property and pass to the beneficiaries of their will. You could suddenly find yourself working with your partner's family. They will need to navigate important decisions with you, probably with little knowledge of the business, which could result in tensions and a misalignment of interests.
Would your family want to fill your shoes, or would you prefer that they receive the value you have strived to build pass to them in cash? If your fellow partners cannot raise the cash quickly, you could leave your family financially and legally entangled.
We assist partnerships in creating the a formal framework to navigate through these situations and provide financial liquidity when it’s needed:
1. Agreeing a value for your partnership.
2. Ensuring partners have a partnership agreement and the right kind of option agreement in place for a smooth transition of ownership.
3. Arranging life insurance to fund the departed partner's buyout.
The demise of a partner triggers a cascade of complexities. In the absence of specific provisions in a partnership agreement, a partner's equity follows their will or, in the absence of a will, the intestacy rules.
Mitigating these issues involves a proactive review of your partnership agreement. Simultaneously reviewing your will or lasting powers of attorney is imperative during this process.
Enter the concept of cross-option agreements. This involves partners granting each other options that come into effect upon a fellow partner’s demise. The agreement allows surviving partners to buy the deceased's equity at market value, and personal representatives are given the option to sell the equity to surviving partners.
There are three common types of option agreements.
Obligates the deceased partner's beneficiaries to sell their inherited share of the partnership and binds the surviving partners to buy it.
Creates an option for surviving shareholders to purchase a deceased shareholder’s shares before the can be transferred or sold to a third party. It is important that the agreement is worded carefully to avoid creating an option rather than an obligation. Getting this wrong will result in losing Business Relief for Inheritance Tax purposes.
A call option gives surviving shareholders the right to purchase shares from the deceased shareholder’s personal representatives.
A put option gives the deceased shareholder’s personal representatives the right to sell the shares to the surviving shareholders.
A cross option agreement is also known as a buy and sell or a double option agreement.
Creates an option for a shareholder who has suffered a serious illness to sell shares to the other shareholders or directors. The arrangement creates flexibility during a challenging health situation, enabling the shareholder to address any financial needs and focus on the path to health and wellbeing without being tied to the business.
Essentially, the single option agreement serves as a valuable financial safety net for shareholders facing health-related challenges.
Alternatively, the partnership agreement may ensure the deceased partner's share passes automatically to the surviving partners. This surviving partners will then need to find a way to compensate the deceased partner's beneficiaries for the financial value of the equity.
The alignment of life insurance is pivotal to secure a lump sum cash payment if the agreement is ever activated, ensuring quick settlement during critical times and minimising business disruption.
Example of Fred who is x years old and a key project manager. The business could lose £xM if he dies. The cost of a 5 year renewable term life policy is £x. Being in his mid 50's, he's is in high risk age range for cancer.A diagnosis of prostate cancer could knock him off track and increase costs by £x. A 5 year renewable Ci policy would cost £ a month. As a percentage of the contract value, that's just 3%
Active Business Protection Limited is an appointed representative of Active Mortgage Services Limited,
which is authorised and regulated by the Financial Conduct Authority.
Registered office 3 Highcliff View, Westgate, Guisborough. TS14 6AY
Registered in England with company number 14535477
