Life Insurance For Business Partners

 

Most people don’t realize that being in business with partners requires a special kind of attention. Basically, you, as a business partner, have selected a partner based on his/her strengths, your complementarities, his/her knowledge, business network, skills, name it! But the main point is that if you are in business and have a bright future with success is because you are together! So what would happen if one of you dies suddenly? What would be the effects on your sales, technical knowledge, your network and your bottom line if the person in charge of it passes away?

There is a value attached to a partnership. Of course, this value will change in time. As the company flourishes and the profits take off, probably that the value each partner has gone up as well.

So to make sure that, in the short term, the cash flow of the company is not affected by the death of a partner, you must use a life insurance coverage to protect you from the “costs” of replacing your partner.

What are the costs associated with a partner dying?

  • Training for expertise: if your partner is the one that has great technical knowledge or is the one that produces all the material, you will have to train the rest of your team to be able to deliver a product at the same level of quality
  • Hiring to replace: unfortunately, the empty position will have to be filled out either by you or by someone else already in your company. In either case, you may have to hire personnel to help you out with the extra tasks
  • Legal fees to take over: lawyers, notaries, accountants and other specialists will work with you as you make the transition
  • Loss of important clients: maybe some clients are accustomed with the work of a partner more than the other and/or some clients will be less confident doing business with you as you might have difficulties staying on top of your game now that you have lost your partner
  • Loss of capital (investor): if your partner was the one pouring new investment capital into the company you lose your financing
  • Buy back the company’s shares: if you have a 50-50 participation in your company, you will have to buy back the shares of the deceased person. It is pretty rare to see the remaining partner to be now associated with a new partner that he has not choose. More than likely, it is the spouse of the deceased partner that inherits the company’s share. So she will be in charge of 50% of the decision making process, even thought she is not aware of how to run a business.

Having done a list, you are now more aware of the costs involved when a business partner dies. It is more than crucial to be well prepared, because, as you well know, when money is involved, people don’t settle things really easily.

How to evaluate your needs

Even thought you just started your business, you should have a protection in force to cover either your initial investment or all the credits, loans and payments that you have already engaged in. If anything happens rapidly, your company will suffer a lot, but you, as a partner, won’t!

  • The first point to cover in depth is all the costs and fees associated with a takeover and replacing the dead person. So thinking of hiring people, training people, having an administrative assistant helping you out. Then, add to that all the specialists that are going to take time making sure all the legal procedures and government documents are completed and the transition is properly done. Also, take a look at your current client list and evaluate if some of them would go elsewhere if one of the partners passes away or potential clients that would turn their back on you, now that you are alone in the project. Finally, if you have an investor partner, make sure to evaluate their financial contribution for the coming projects and cover those up.
  • The other point to analyze is to buy back to company’s share. This is where you will probably need the help of your accountant and lawyer. It is always better to settle specified clause before anything happens. It is also easier to fix a certain amount up front and renegociate as things improve over time.

Now that you have more tools in your hands to better protect your business, I recommand to read about a case that I have worked on recently and that will wrap up all the elements. Fortunately, this case was well prepared before the fatal day arrived and everything went well when the transition started.

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