Saturday, July 2, 2016

Partnership Insurance (A Case Study)

Partnerships are made in Heaven; But not all Partners survive the ride through HELL.
 – Sanjay Tolani

What is partnership insurance and who needs it?

Many companies are built on the symbiotic relationship between partners, therefore protecting the value of that partnership is the key to success. Unfortunately, many are unaware on how to protect this value in the event of a mishap like death of a partner or loss of income due to an illness.

The idea is to protect each other’s interest by purchasing an insurance plan; where the company gets enough liquidity to be able to buy out the share from the deceased partner’s family or provide liquidity to hire managers to continue taking care of the responsibility of an ill partner. This liquidity will protect the company, the partnership and the family in maintaining the status quo.

Investors who invest into a running business, may want to protect their investment, by insuring the working partner, as in the event of an unfortunate illness or death the business would be without a captain to steer the boat away from the rough waters; and could cause big losses to the investor.

What can you include in your plan?

The plan is designed according to a partnerships need. For example, it can include an income protection cover; in the event of a major illness; a partner is unable to work for a long period of time, the productivity of the company may significantly be reduced. The company would be provided with a lump sum amount of cash to sustain this “Loss of Income”; thereby buying time for the partner to recover.

It can also include the involvement of a family member of the deceased partner in the business as a part of the inheritance and succession plan, or hiring a new manager to assist with the responsibilities.

A well designed plan also needs to be reviewed with changing circumstance, changes in responsibilities and changes in succession.   

A Real Life Case Study

Company ABC Ltd. had 3 partners; John, Jim and Jack. The three partners shared different responsibilities in the business and held equal shares. The Auditors had valued the company at US$ 15 Million.

Unfortunately, when John passed away; the partners had to decide what the future of the company would be. Would John’s family continue to get profits in equal share as the partners? Who will undertake the burden of John’s responsibility? If the partners want to buy out John’s shares; where will the liquidity of US$ 5 Million come from? Will the wife sell the shares?

Partnership insurance opens up many ways to handle such a situation. Discussing a succession plan, inheritance and liquidity to buy out shares can all be covered in the Partnership Insurance Document.

If you do care about the future of the business you are building, ensure to insure the partnership.  Please share this information with everyone around you. 

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