Key Person Insurance | Partnership & Shareholder Agreements
How good your partnership agreement is may be put to the test when the need arises
Need to Move Out
A business partner may find himself in a situation where he needs to move out of the state. He signed a partnership agreement that contains first right of refusal. The agreement also confers obligations only and not rights to the departing partner. He may offer his share for sale but his partners are not obligated to buy and another buyer may not be easy to come by on a minority share.
The situation could have been easier to deal with if the partnership agreement allows exit options for all parties.
Need to Force Out
A partner who suffered from cancer was granted $500K by his trauma cover. His equity is $1M and while in remission, he went back to work on part-time basis. Since his diagnosis, his partners have rendered extra hours to cover for him yet the part-time basis partner is still entitled to a third of the profit and they want him out.
Because the partnership agreement did not stipulate that option, no partner may be forced out even if the sick partner was compensated for his equity. An appropriately written agreement could have provided better exit options, allowed the $500K trauma payment to be deducted from the total amount owed to the sick partner. He gets paid in full, and the remaining partners can continue doing business.
Need to Opt Out
When a partner no longer wants to stay in the business and needs to opt out but can’t force his partners to buy out his share, there is not much he can do. If his partners don’t agree, he may not get his full business equity.
But with appropriately written key person partnership agreement, exit options may allow him to force his partners to buy him out when he needs to go.