Business succession agreement for partnership

Business succession agreement for partnership

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This document is a business succession agreement for a partnership.

Many businesses fail to address business succession issues that may occur if there is an involuntary or voluntary departure by a principal of the business. Failure to deal satisfactorily with this fundamental business management issue can lead to expensive litigation, loss or diminution of the value of equity in the business, or even the failure of the business itself.

Practitioners who are involved in business succession should consult experts, such as accountants and tax specialists. These experts will be able to work out formulae relating to valuation of the business, and will understand the tax implications of succession. For example, capital gains and how to avoid unnecessary tax liabilities.

When considering business succession planning, it is important to consider both voluntary and involuntary departure from a business by principals, and the effect that this would have on the equity in the business.

It is essential that related documentation dealing with voluntary departure issues also be reviewed or put in place at the same time as the business succession agreement for an involuntary departure.

Voluntary departure

Where the principal’s departure is involuntary, for example, due to death, total and permanent disability or trauma, there are funding mechanisms, such as various forms of insurance, to mitigate the risk of such a departure.

This precedent is an example of a business succession (or equity insurance) agreement where the involuntary departure arrangements have been fully funded by insurance.

Principal and proprietor

This precedent distinguishes between the principal and proprietor of the business of the partnership. In many partnerships, principals and proprietors are the same: the person who has some form of corporate responsibility for the business (principal) has equity in the business (proprietor).

However, there are a number of partnerships where:

  • certain partners have distinct management roles, and other partners have nothing to do with the day to day management of the business but have equity in the business, (such as silent partners); or
  • the partnership relies on the experience of certain employees for the successful management of the business.

Neutral trustee

This agreement suggests the use of a neutral trustee, such as a trustee company. The use of a neutral trustee minimises the risk of disputes created by tensions between continuing principals and either the exiting invalid principal or the relatives of a deceased principal.

This document has been authored for Lexis Nexis by Michael Heraghty, Partner, TressCox Lawyers, Rosemarie Ryan, Barrister and Elise Margow, Principal Legally Speaking.

This document is prepared with the assistance of Specialist Editor Stephen Newman, Executive Counsel, Ponte Earle.