My two business partners are considerably younger than me. I am 48. Unfairly, I believe, they have started to make comments along the lines of what will happen to my shares in the business if I die?
Their concern, as I understand it, is that my family will inherit my shares when I die and my wife and children have no interest in the type of work we do. What do you recommend?
I am sure your partners are not being cruel. Quite the opposite, they are sensibly thinking about business continuation.
The starting point is probably for you to think along the same lines. What would you want to happen to your shares in the partnership in the event of your death?
I imagine that you would want your wife and children to benefit financially from the shares but your business partners will want to continue to own the business.
In practice, each of you will take out a life insurance policy for a chosen amount. The amount will need to be a figure determined to represent the value of each of your shares in the business.
This might be quite difficult to establish. Valuing a business is sometimes like putting a value on a house – it is only worth what someone will pay for it. You will no doubt take into account the value of the assets of the business, goodwill, the value of your order book and the reputation of the firm.
Each of you takes out a life insurance policy on your own life but in trust for the benefit of the surviving partners. In the event of your death, the money will be available at the right time but you might agree that it is in the wrong hands – your surviving partners'. Your family owns the shares, your partners have the money.
What you now need is a device to switch the shares to the partners and the money to the family. This is known as a cross-option agreement. It is a formal agreement between the business owners which deals with what may happen to their share of the business on their death.
Often, two options are included in the agreement. This is something known as a double-option agreement. The surviving partners will have the option to purchase the deceased's shares in the business while the estate of the deceased will have the option to sell to the surviving owners.
Usually, if either party to the agreement chooses to exercise their option, normally within a timescale, then the agreement will become binding on the other party.
You mentioned that your business partners are considerably younger than you. This might generate a problem in that the cost of the life insurance policy for you, all other things being equal, will be higher than it is for them. Your partners may pay considerably less by virtue of their age.
Of course, the counter argument is that it is your family who will benefit from the life insurance cash and are more likely to do so because you are older.
If the difference in cost is very significant, then you might agree a side agreement which balances out the cost by allowing you to take a greater share of the partnership profits.
Any arrangements you put in place should fit with your partnership agreement. The partnership agreement you have will dictate what happens to your partnership in the event of the death of a partner.
Two other things to give consideration to are the retirement of a partner – I suspect from what you have said that it will be you first – or the illness or disability of a partner.