June 2003

Down to Business
Office Know-How

Your Dead Partner's Wife's New Husband
Could Be Your Next Business Partner
by Sid Friedman

Editorís Note: The following column by Sid Friedman, president and chief executive officer of Philadelphia-based Corporate Financial Services, is a new addition to SHELTER magazine.

Hereís one from the real world of building products: You and two partners started a business manufacturing and installing staircases and stair parts. Over the course of ten years, you have become known for your fine craftsmanship and your ability to stay current with ever-changing local building codes. The orders just keep flowing in. Youíve even landed a nice contract with a large homebuilder to install your trademark designs in all of their new upscale townhomes. Youíre meeting all your sales targets and more, and youíve got a great business going. 

Then, tragically, one of your partners dies. Two weeks later, his widow shows up on your doorstep. She has a family and wants to discuss her share of the business. 

You need to help. You and your remaining partner scrape together the cash on hand and make an offer. She appreciates the effort, but itís not enough to see her kids through college. Instead, you offer to pay her 75 percent of what her husband drew as salary. Everyoneís happy, until two years later, when she remarries. Suddenly, her new husband wants in on the action. He doesnít know a jobber from a job, and heís looking 
to avoid gainful employment in the futureóby enjoying the fruits of your hard labor. 

Suddenly heís demanding to know why his wife isnít being paid the same salary as the other two partners. His lawyer sends a letter, executing her rights as a minority stockholder. They want all the records. 

You offer to revisit a buy-outóbut heís not buying. Instead, he wants more money and an active role in the business. Say hello to your new colleagueóyour dead partnerís wifeís new husband. 

According to the American Council of Small Businesses, less than 22 percent of businesses today have a properly drawn and funded buy-sell agreement. When it comes to establishing business partnerships, I always say that the time to plan for a "divorce" is when youíre signing the "marriage certificate." Neglecting to plan adequately for the succession of your business could mean the failure of that business upon your death. 

Each staircase youíve built over the past decade has brought you that much closer to realizing your financial dreams. Each year, youíve climbed higher and higher toward your goal. Donít let some Johnny-come-latelyówhose only claim to your business is that he successfully romanced and married your partnerís widowótry to push you down to the bottom. Thatís why you should have a buy-sell agreement.

Preventing Problems
A buy-sell agreement can help prevent the problems that can occur if a partner dies too soon, retires or becomes disabled. It is a legal document drafted by an attorney to provide for the smooth succession of your business. The agreement specifies the terms under which a designated co-owner, employee, heir or other party will buy the deceased, disabled or retired partnerís interest in the business. 

A buy-sell agreement allows you to plan for the orderly transfer of company ownership among partners and their survivors. It serves to fix the problem before it happensóto guarantee you wonít have a blustering new spouse banging on your door. After all, do you really want to be in business with your deceased partnerís wifeís next 

The great thing about a buy-sell agreement is that all sides have to agree on its terms. You can iron out any differences of opinion right at the outset. You can determine exactly what amount will be paid to the surviving spouse upon the death of one of the business partners.

Determining Funding
You can even determine how the buy-sell agreement will be funded. Funding helps ensure that money will be available to carry out the terms of the agreement and the purchase. For example, when your partnerís widow comes to see you, you would be able to offer her a set amount for her husbandís share of the businessóand be able to provide those funds in one lump sum. This would eliminate the possibility of her future husband demanding a share of the company.

How do you get these funds when most of your profits likely go right back into the business? One popular funding option is insurance on the ownerís life. This type of insurance helps guarantee that the beneficiaries will receive the agreed-upon price for the business. 

For example, say you have been in an equal partnership with one partner for ten years and your business is valued at $1 million. You both have families with no interest in taking on the business. You can draft a buy-sell agreement that calls for one partner to buy the otherís share at a specified price upon the latterís death. In addition, you can purchase $500,000 insurance policies on each otherís lives. That way, if your partner dies, you will receive $500,000 in insurance proceeds with which you can purchase his share of the business from his widow. That way, you get the business and your late partnerís family receives the agreed-upon price for his share.

Excuses, Excuses
The biggest excuse most people make about not having a buy-sell agreement in place is "I donít have the time." Thatís especially true in the building industry, where the hours are long, the labor physically demanding and the responsibilities endless. Still, this excuse is simply unacceptable. You must make the time. If you donít plan for the future, the business youíve built so carefully, in which youíve invested so many hours and years of your life, can be ripped apart. 

Again, when youíre in a business partnership, you must be prepared for three things: dying too soon, living too long and becoming disabled. Few business owners today prepare adequately for even one of these things, let alone all three. But itís key that you and your partners do so. 

Make arrangements for yourself and your partners in the event that one of you lives too longówhich means adequate funding for your future retirement. Youíve spent years building a business and putting your heart into every aspect of its evolution. Youíd like to have something to leave to your spouse and children. The best favor you can do for them is to make sure each partner has adequate retirement savings, so they donít spend their golden years draining the business of profits. 

Finally, you want to make sure youíve made provisions in the event that one of you becomes disabled. You should buy out your interest in the business if you become totally and permanently disabled. 

Life Insurance Policies
Each partner should also have proper life insurance. Many business partners make the mistake of thinking term insurance will cover them. However, in the case of a business partnership, you need whole life insurance in your buy-sell agreement. With whole life insurance, if you donít die, you can get your money back. The amount of insurance you decide to purchase can vary according to the perceived value of the partner. For example, partner A may be responsible for pursuing and signing deals with the largest homebuilders, bringing in 50 percent of the companyís annual revenues, while partners B and C are accounting for only 25 percent a piece. If partner A becomes disabled and canít work, the company is going to feel it a lot moreóthus you must make sure you purchase more coverage for him. 

Assuring Success
With a good buy-sell agreement, proper succession planning, ample retirement funding and sufficient life and disability buy-out insurance for all partners, youíve assured the continued success of your business should something catastrophic occur among the partners, which leaves you free to focus on the work at hand. 

Youíve put everything youíve got into your work, and youíve built a reputation for delivering and installing quality products on time. Donít let your years of effort go to waste. Maybe youíve been planning to sit down with your partners one of these days to discuss a buy-sell agreement, but just havenít had the time. Take it from me, life is what happens when you're making plans. Your business is your life's work. Unless you want to be in partnership one day with your deceased partner's next spouse, get a solid plan in place today. 

Sid Friedman, CLU, ChFC, RHU and LUTCF, is president and chief executive officer of Corporate Financial Services in Philadelphia. Author of five books, he runs a 
successful insurance and financial advisory practice. SHELTER readers can visit his website at


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