Business Succession Planning for When a Partner Leaves Unexpectedly
When you're running a business, you rely on your partners for their skills, knowledge and support. What happens when a partner leaves unexpectedly because they quit, get sick or pass away? If you don't have a plan, it could leave you scrambling and put everything you worked for at risk. Here's how you can prepare ahead of time with a business succession plan.
Handling a partner's exit
When a partner leaves your business, it can be a complicated situation. Not only are they a key part of running the organization, but they also own a portion of the business. It's important to determine what will happen to a former partner's shares. Will they sell them back to the business, keep them or sell them to someone else, giving you a new partner?
The dynamics can be even more complicated when a business partner dies because their heirs may inherit the shares. This means you end up in a situation where your deceased partner's spouse, child or other heir suddenly becomes your new partner, even if they don't have experience with the business.
How to plan
To avoid confusion and trouble, have a clear succession plan that specifies what happens when a partner leaves. In your agreement, lay out how you'd like this to happen by answering questions such as:
- How much advance notice does a partner need to give before leaving if they do so of their choosing?
- Will your business buy out their shares and at what company valuation?
- If your business can't afford to buy out the former partner, can they sell to anyone else? Or would your company need to approve another buyer?
- Does the former partner agree to train their replacement before leaving?
Also, consider setting up a buy-sell agreement with all your business partners using life insurance. If a partner dies, the life insurance would pay your business money, which you would then use to buy the deceased partner's shares from their heirs. This way, you are free to pick your next partner while the surviving heirs get extra money.
In addition to figuring out the business succession agreement, plan for how you'd replace a partner's work at your organization. Because life is unpredictable, this is something to figure out before someone discusses leaving.
Start by documenting the day-to-day work of your business partners and other key employees. Have everyone make a list of what they do with instructions. They should also collect all essential documents and business contacts in one place, like a shared cloud folder, so that information isn't lost.
Cross-train your staff so you don't have just one partner who knows how to perform the critical tasks associated with their role. This way, even if a partner or key employee leaves suddenly, you're still able to operate the business as normal until you find a replacement.
Figure out how you'll operate during the search and evaluation period for a new partner. Can you manage with the rest of your staff as a transition team? Is there an interim person you could hire, like a company mentor or board member, while you find a replacement? The goal is to buy yourself time so you can properly search for your new partner.
Bringing on a new partner
With your company operating properly during the interim, you can focus on bringing on a new partner. Ideally, you'll want someone who can replace the departing partner's skill set and personality traits, that you don't have and are missing from your organization. Focus on this during your interviews.
As you search for a new partner, consider whether there is anyone from within your organization who could be a good fit. Because they already know your business, this will speed up their training while showing other employees they have advancement potential.
If possible, see whether the departing partner can help with this process, both in interviews and future training. They might have a better feel for what their replacement needs because they've done the job themselves. Finally, keep your eyes out for potential new partners even before someone leaves. This way, you have some candidates lined up in the event of a surprise departure.
By taking these steps and coming up with a succession plan, you'll make sure your business continues running smoothly, even if a vital partner leaves.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.