When a partner dies, their share of the business will normally form part of their estate and subsequently be passed to their family. The family then has two alternatives:

• A member of the family could take over the deceased’s position as partner to appoint someone to act on their behalf.

• Realise the value of the share in the company by selling it.

Both these options can present problems to both the family and those remaining in the business.

In the first option, a member of the family may not have the inclination, qualifications or experience to do the job. The family could also have problems finding someone suitable and trustworthy who would be willing and able to act on their behalf in the business.

This option may not be attractive for those remaining in the business either. Understandably, they may be reluctant to invite a member of the family to become a member of the board; especially if that person does not have adequate experience. This would particularly apply if the family only had a minority shareholding in the company or the shareholding had been split between several siblings.

The second option would probably be preferred by both the family and the remaining partners if the family are prepared to sell the share back to the surviving partners.

However, this relies on the surviving partners having sufficient funds available for the purchase. Individuals (or indeed the company) may have to resort to liquidating assets, borrowing money or trying to find a suitable replacement partner who is in a position to buy-out the family’s share. It is far from certain that any of these options would be open to the business.

For example, if one of the partners in a computer software development company died and he was the technical expert behind the success of the partnership, there may be few assets, if any, to liquidate, he may be extremely difficult, if not impossible, to replace and the bank may not be willing to make a loan to the remaining partners if they do not see the business being viable without the technical expert.

It is easy to imagine similar scenario’s with small- and medium-sized oil & gas companies, firms of solicitors, media agencies or almost any other profession.

For the family, the sale of the share may present real difficulties if the surviving partners are unable or unwilling to buy out the share in a reasonable period of time. Generally, shares of partnerships and small private companies are not readily saleable and, even if the family did find a buyer, they may not receive the full market value of the share – especially if it is a minority shareholding.

Additionally, if the family did manage to sell their share to a third party, it could lead to difficulties for the remaining shareholders and possibly a takeover or merger.

Ultimately, if the family and the business cannot resolve the situation satisfactorily, it may lead to the business being forced into liquidation; with both sides coming out poorly.

How can Candour Consultancy help?

A carefully written share protection plan will ensure that on the death of a partner a lump sum will be made immediately available to the remaining partners, enabling them to buy back the share from the family, remain in control and ensure the continuation of the business.

Such a plan would consist of a life assurance policy combined with a share purchase agreement. Contact Candour Consultancy for a quotation for your company.

We usually use term assurance policies to provide the lump sum; normally written in to expire at the partner’s expected retirement age.

However, if one or more of the partners does not know when they will retire, or there is the possibility that one or more may continue to work past their expected retirement age, we would also look at a whole-of-life plan as an option to provide extended coverage. The policy can then be encashed when it is no longer required.

If the business is in its early stages or expected to grow further in value, we would also take into consideration that the policy allows for the sum assured to be increased.

If a partner is likely to need to sell his share of the company on retirement, we would also recommend an offshore savings vehicle to ensure the company/partners have sufficient funds to buy-out his share and again avoid the potential problems outlined above.

For further information on how to assess your company’s potential liability or to obtain a quotation for cover, just click here to provide us with your preferred contact details and an overview of the company.