Death of a business partner

The sudden loss of a business partner, either through death or the onset of long-term incapacity may not immediately appear to be a concern for parents planning to cover school fees. But the effect on a commercial operation can have major consequences which could impact on personal finances.

Problems can arise from a lack of forward planning about what might happen to the business in such circumstances. This should be covered by the articles of association, but in practice it seldom appears to be. So many businesses are now adopting “corporate wills” which effectively set out what will happen to the business in the event of the death or long-term incapacity of an owner.

Why is this important?

The principal reason this is so important is that if a business partner dies, unless there is alternative provision, his or her share in the firm will pass into the estate and then on to beneficiaries over whom the remaining partners have no control.

This is important, because the new part-owner may have very different ideas about how the business should be run; or may simply wish to maximise the value of the business in order to facilitate a quick sale. This is unlikely to accord with the wishes of the remaining partners.

And it is not just on death that problems can arise. If a major player in the business is incapacitated through illness or injury and this is likely to last for more than a few months, pressure might be brought to bear by the family to release cash in order to cover additional expenses associated with the situation; or even to gain a power of attorney over the share in the business and thus to disrupt its smooth running.

The existence of a formal agreement as to what will happen under such circumstances will help considerably, but it is also important to ensure that there is adequate money within the business or through insurance, to make whatever financial compensation is agreed to the family, for their loss of control they would otherwise have enjoyed.

The wider problem

It is not just potential ownership – important as this is – that can be at stake. If the partner is a key figure in the business, then there will be additional disruption, such as loss of management skills, loss of confidence from bankers and other creditors and a reduction in the strength of customer relationships.

If this is likely to happen, it is essential that insurance is in place for the benefit of the business itself, rather than the owners and their families, to cover the cost of recruiting and training a suitable replacement. To find someone of sufficiently high calibre to be able to ‘hit the deck running’ will probably involve a higher salary than was paid to the previous incumbent; and there are also recruitment fees to consider. It is not unreasonable to consider a death benefit of at least twice the individual’s earnings, and an income benefit at a similar level.

It is important to consider the “financial health” of a business as this could affect the owners’ ongoing ability to meet school fee commitments.

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact your usual independent financial adviser.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.

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