Death or serious illness of a partner can jeopardise the future of your business
Published 11/08/2015 | 00:00
Q I run a successful Legal Practice with three other Solicitors. We are considering putting 'Partnership Insurance' in place. Can you please explain what this is and how it may be implemented?
A The death or indeed serious illness of a partner can have serious implications for the future of your business and for the families involved. Such an event can cause immediate financial hardship for all concerned and can also jeopardise the future of your business and the livelihood of the remaining partners. In the event the deceased partner has family or next of kin that were financially dependent on him/her, the financial effects can be devastating.
Often a partner's share of the business is the single largest financial asset he/she owns. On death of a partner, their next of kin may expect a substantial payment from the remaining partners. This payment may be expected due to:
•Any capital the deceased partner had invested in the business.
•The deceased partners share of undrawn profits.
•Payment for the deceased partner's share of the goodwill of the business.
•Loans the deceased partner may have provided to the business.
In the event of this occurring and where partnership insurance is not in place, there may be consequences such as:
•The remaining partners may be forced to take out a loan to pay the deceased next of kin. Whilst this may have been a relatively simple process in the past, obtaining a loan from your bank or credit institution may now be a much bigger challenge.
•In the event of not being able to raise the required capital, the remaining partners may be forced to take on the deceased's partners next of kin as their new partners.
What is Partnership Insurance and how can it help?
A Partnership Insurance Plan consists of 2 parts, a Legal Agreement and Partnership Insurance.
1) A Legal Agreement - provides for the event that on the death of a partner the remaining partners will buy back the deceased's share of the partnership and the relevant next of kin will likewise sell their inherited share to the remaining partners.
2) Partnership Insurance - this provides the financial capital required under the legal agreement for the remaining partners to buy back the deceased's share of the business from their next of kin.
This formal arrangement allows the remaining partners to retain full control of the business and also allows the deceased partners next of kin to rapidly realise the value of their share of the business. Taking the time to plan for this event now could solve some potentially very serious issues.