Partnership Protection Planning

Safeguarding your partners' interests also safeguards yours and ensures business continuity.

What is Partnership Protection Planning?

Partnership Protection Planning

Many businesses are founded by 2 or more founders or business owners because each possesses strengths and expertise creating a synergy that contributes to the success of a business.

 

The business owners may be family members, friends, work colleagues or several persons carrying similar interests & vision for the business. Regardless of the relationship, protecting one another’s interest is part of wise & prudent planning.

 

Most business owners start their businesses without giving consideration to business successions or exit strategies because many believe that they would like to run the business forever or at least a couple years before they re-think their life goals. However, with the recent COVID-19 pandemic we have all experienced, early planning is always better than late planning.

 

Partnership protection planning is about safeguarding the business interests that are held by each partner of the business and the entire value of the business. In other words, if there are 2 partners in a business with a 70-30 ownership & profit sharing model, they will be protected for the amount of investments they have put into the business and contribution to the success of the business. In addition, the protection allows for the business to continue running even if there is only 1 founder remaining (without outsiders coming in!). The key is to secure steady & safe cashflow for business capital and expansion to beat market competition & stay on top of the game!

Tools For Partnership Protection Planning

There are several tools that may be useful for partnership protection planning which are:
1. Buy sell agreements
2. Keyman insurance
3. Share Buyouts
4. Exit contingencies

The ultimate choice of tool depends on several factors such as business nature, owners’ interests & intentions, available cashflow & finances of the business, etc. For some businesses, it may be a blend of the various tools to ensure smooth transitions.

What is a Buy Sell Agreement and How Does It Work?

A buy-sell agreement (buyout) is an agreement drawn to protect a business. It stipulates what happens to the shares of a business if something unforeseen occurs. It provides a mechanism for an orderly business succession should an owner decide to transfer his interest due to a voluntarily event, such as retirement, or an involuntary event, such as death, disability, insanity, or bankruptcy. Any such event is referred to in the context of a buy-sell agreement as a triggering event. It also affords the co-owners or the business entity the ability to maintain the option or mandatory obligation to purchase the interest from an existing owner in order to restrict outsiders or undesirable business partners from becoming owners. This is often a useful provision for family businesses.

In order to avoid internal conflict and a smooth transition in situations where one or all owners desire to leave the business, a good buy-sell agreement may have any of the following additional provisions:

  • Call rights (the SME at any time can elect to purchase an owner’s interest for a premium, i.e. 125% of the fair market value)
  • Put rights (an owner can demand the SME purchase her interest at a loss, i.e. 75% of the fair market value)
  • Deadlock provisions (i.e., a mechanism for owners to part ways or dissolve the SME)
  • Right of the first refusal (i.e., an owner is permitted to sell his interest to a third party provided the other existing owners or the SME refuse or waive their first right to purchase the interest)

Generally speaking, all of these provisions attempt to streamline situations in which the SME no longer desires a particular owner be part of the business, when an owner wants to sell, or when one owner wants to acquire the interest of another. Whether because of deadlock or simply a voluntary departure, each of these provisions provides a smooth transition in such event. Again, as noted above, it also prevents any unwanted owners from being a part of the SME.

Having a buy sell agreement is place is important but an often overlooked aspect is the available cash funds to buy out the shares. How can a partner ensure that his other partner will have sufficient funds to buy the shares reflecting the overall market value of the company? There are many funding ways:

1. Own cash 1 for 1
2. Borrowed cash 1 for -1 with interest incurred
3. Interest free leveraged cash 0.1 for 1

To find out how to enjoy interest free guaranteed cashflow funds to ensure that your business will continue to run & keep its competitive edge, get in touch with our wealth advisors today for complimentary advice with no obligation (that’s our promise!). Schedule a 15 minute meeting by filling out our inquiry form.

 

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