Partnerships
and Death?
Have you thought about what will happen to your business when your partner dies? The death
of your partner could automatically and immediately bring an end to the partnership. If no
other arrangements have been made, the partnership no longer exists as a legal business
organization -- except for the purpose of winding up its affairs.
When a partner dies, the survivors have only two alternatives: they must either liquidate
or reorganize.
Liquidation usually is not a good solution. The business generally will have to be sold
quickly, and for only a fraction of the value it had as a "going concern." In
most cases, good will is lost entirely. Physical assets may bring little more than
one-fourth of their true value.
Reorganization Scenarios
Reorganization generally is a better answer. A reorganization of a
partnership usually follows one of four scenarios:
 | Your partner's heir(s) become new partners. This plan may or may not work. One or more of the heirs might be a minor, and few of the heirs, if any, will have been regular employees of your business. They may not have the knowledge and experience needed to be a partner. ............or.............. |
| Your partner's heir(s) sell their interest to someone else. This means you may not have a say in who your new partner will be. ............or............. |
| Your partner's heir(s) buy your interest in the business. In most cases, the heirs simply can't afford to buy the business. Even if they can afford to buy, they may not be willing to pay a price which adequately reflects the value of the business...........or............ |
| Your partner's heir(s)
sell their interest to you. This would be an ideal solution if the surviving partners can
raise a sufficient amount of cash and if they can agree on the terms of the purchase with
the heirs. |
The best solution is to
plan ahead for the sale of your business upon the death of a partner. This can be
accomplished with a "Buy-Sell" agreement.
A properly structured Buy-Sell agreement can establish the business value for estate taxes
and ensures the continuation of the business by the surviving owners. In addition, the
agreement establishes a pre-determined price for the business, as well as providing the
money to actually buy the business from the heirs.
Valuate Your Business
Many business owners have a difficult time determining a realistic fair market value
for their business. Partners can use a number of valuation methods to estimate the value
of their interest in the business. No one method will work in every case but one, or a
combination of several, should serve the needs of most business owners.
No matter which method you use to value the partnership, there is one important factor you
should keep in mind: The Buy-Sell agreement should make provisions for future valuations
of the business -- either through periodic updating or use of a formula. That is because a
fair market value which is "just right" today may be too low next year and
entirely inadequate in five years. When partners devote the bulk of their time efforts and
ability to the operation of a business, its fair market value usually continues to
increase. This constant appreciation should be taken into consideration when valuing the
business.
