I suppose on superficial level that title deserves an explanation. Toilets replicate death. Not deep enough? When something disappears down a toilet you can’t get it back. In almost all cases that’s a good thing, right? But life is like what’s in that toilet. In most cases one minute it’s there and the next it is gone…..forever.
OK, maybe not the best analogy but it worked in my head so let me try, just give me a few minutes, to get your head wrapped around this idea about life and life insurance in both your personal and business lives. We’re all grown ups and we’ve all watched most of the scenario play out when a friend or loved one dies and leaves behind a family or a business partner, or both. It happens and we know it happens because we’ve seen it. It happens and we know we aren’t immune from it because other than old age, none of those deaths were timely and most of deaths aren’t well planned for.
Take for instance the story of two business partners. They had been working together and were very successful for over 10 years and because the business did so well, so did their families. Both wives enjoyed the luxury of being stay at home Moms devoted to giving their children all the best, from attention to education. As often happens with very successful businesses the owner or owners assume the blessing will just go on and on and everyone will live happily ever after, so what’s to plan for right? Now to be fair planning takes money, not always a lot, but it will take money and that is money that business owners have to not take home with them so it actually reduces their income to some degree. In a partnership as described above these guys probably have liability insurance, worker’s comp insurance, property and casualty insurance and some kind of over all umbrella policy to catch what they might not have covered. But in this partnership what they have missed is the ultimate what if. What if one of them dies? One minute you have a partner that is integral to the success that you’ve both enjoyed and then you don’t.
Let’s dig into the aftermath. By law your partnership still exists, you just have a new partner and that would be the wife of your long time friend and business partner. The biggest bit of luck you could possibly have would be that the wife has all the skills and the desire to take over where her husband left off. She will have to give up the stay at home thing, but she would still have the income and, big sigh of relief, you don’t have to buy her out by giving her the value, the monetary value of 50% of the business. The likelihood of this happening are near zero. Successful partnerships are a rare breed and they are tied to both the interwoven skills and a tight knit complimentary relationship.
So the reality is that you are going to have to arrange to pay half of the company worth to your partner’s widow. And whether that is $250,000 or $10 million, in the absence of a well planned partnership buy/sell agreement funded by business life insurance, that money is going to be almost impossible to find. Banks won’t loan it to you. They are more likely going to lean toward calling loans due because of the loss than they are to lend you money. I feel safe in saying that almost no company ever has half of their net worth laying around in a bank account so it’s not coming from there. Where it almost always comes from is the liquidation of the company assets which almost always results in the end of the company. The widow, as a result of this, will receive pennies on the dollar compared to what her husband’s half of the company was worth. The surviving partner will retain pennies on the dollar for what he and his partner had worked so long to build, only to have to start over if that is possible.
Bottom line. It’s always traumatic to lose a business, but compounded tremendously when you lose a friend and business partner and a very successful business all at once. You have two partners (or more) and two families (or more) dependent on you planning ahead. Call or email me directly if you have questions on how to structure and fund a buy/sell agreement or if one partner has health issues that make the business life insurance a challenge to get. My name is Ed Hinerman. Let’s talk.