How to Protect Your Company in the Event of Your Business Partner's Death

The following article has been written by my colleague Rob Graff.

Guest Blogger - Robert H. Graff is a 2007 graduate of Villanova University School of Law and a 2004 graduate of the University of Pennsylvania, graduating with honors.  While at Villanova University School of Law, he was a staff writer on the Sports and Entertainment Law Journal and was awarded The American Bar Association Section of Intellectual Property Law & Bureau of International Affair, Inc. Award for Excellence in the Study of Intellectual Property Law.   Mr. Graff has been awarded Best Lawyer by the Main Line Media News for 2012 and 2013. He has a perfect "Superb" rating on AVVO. His newest venture, "The Graff Standard" seeks to aid business professionals in reconnecting to a happier them and finding a work/life balance. Contact us for more information.

How to Protect Your Company in the Event of Your Business Partner's Death

Do you know what would happen to your company if your business partner died? Are there provisions in place to protect you, or is there a chance his share of the business could go to his spouse or kids, leaving you with a business partner who doesn’t have the company’s best interest at heart?

For example, let’s say you and your best friend Sam have dreamed of owning a butcher shop together since grade school. After years of thinking about it, you finally decide to take the plunge and open a shop in 2009. Because Sam had some extra knowledge of the butcher industry, he owns 55% of the company to your 45%.

Things progress swimmingly for you and Sam, both professionally and personally. The shop is profitable, and Sam gets married to the love of his life, Mary, in 2011.

Fast forward to 2014. The butcher shop is doing great. You and Sam own five locations and are making money hand over foot. It seems like life couldn’t get any better, and then the unthinkable happens. While at work in the shop one day, Sam is killed in a freak accident.

After the funeral is over and the dust settles, Mary< Sam's wife, approaches you. It turns out she never liked the idea of the butcher shop in the first place, and after losing Sam in such a horrific way she wants to sell Sam’s shares of the company. Because Sam owned a larger percentage of the company and his personal will left everything to Mary, legally she can sell control of the company to whomever she pleases. In response, you can either buy all of her shares or become stuck with a partner that did not help you build the business and is not looking out for your interests.

At this point in the game, there’s very little you can do to influence the outcome. Your choices are what they are and you have to work with what you have. However, all of this could have been avoided if you and Sam had discussed this exact situation when you first went into business together.

Instead of leaving the future up to chance, you could have implemented a Buy-Sell Agreement. This is a document that permits the shareholders to decide from the outset how each shareholder’s interest in the company can be handled, notwithstanding each shareholder’s personal testamentary situation. It’s essentially a will for your business that protects the company and your interests in it.

The business also could have invested in a life insurance policy on both Sam and yourself. This would have given the business the funds necessary to buy back Mary’s shares and continue to operate without interruption. Even if the insurance didn’t cover the entire amount, you could buy back the rest of the shares as determined by the Buy-Sell Agreement. For example, the agreement may stipulate that the business has five years to buy back the shares and that during that time any descendant shareholders forfeit their right to vote on the decisions of the butcher shop.

Of course, it’s uncommon for people to think about this scenario when they launch a new business venture. But the truth is the decisions you make today have the potential to impact your and the company’s future. Speaking to an attorney and implementing a Buy-Sell Agreement and an insurance policy will give you and your business partners peace of mind knowing that no matter what happens in the future, the company and your interests are protected.