Buy Sell Agreements And PartnershipsFor the sake of discussion let us assume there are three partners in a business each owning 1/3 of the
partnership
...and each has his area of proficiency. The success of the business depends on them working together to achieve their desired goals. Partner A dies suddenly of a heart attack. Consider how he is to be replaced. It may be possible to find an experienced employee in this partners area of expertise but it will take time for that person to familiarize himself with the manner in which this company operates. It will also take time for the new employee to adjust to his or her new bosses.
Consider the widow of partner A. Will she not need some income from the business to continue raising her family? Will the partnership be able to provide such an income for her until the survivors, partners B and C can come up with sufficient cash to buy out the deceased partners shares. If they cannot the widow of partner A may have to force a sale of the business at much less than it's true value so that she can get her money.
Some business people assume that because they are successful that they can raise sufficient cash from their banks to purchase the deceased shares. The odds are that the bank will be very uncomfortable because of the death of one of the partners. What about taking the money from saving. No good business person wants to do that even if they have sufficient savings...may be in a
pension fund.
The ideal solution is to have a buy sell agreement drawn up before hand bearing in mind the possibility of such a situation. This agreement should be funded by
life insurance
as it is the cheapest way to go. The agreement would state that the surviving partners would purchase the deceased partners shares at a predetermined price.
The widow and children would be happy with the situation as she would receive full value for her shares and so would the surviving partners because they would own the partnership in entirety.
