I have a business acquaintance named Fred, and Fred has a partner named Janet. They make a great team. Fred is a classic entrepreneur type, ready to go off in six directions at once as soon as an idea hits him. Janet keeps his feet on the ground. She’s great at systems, finances, and Fred loves having her as a partner. Together they have built a successful business.
As far as Fred is concerned, Janet is perfect, except for one thing. She has a husband, Albert, who is a jerk. Over the years, he has held one job after another and doesn’t succeed at any. Fred suspects there may be a drinking problem. Occasionally, not often, Fred has overhead Janet crying in the bathroom. He has never talked to her about it, not wanting to intrude on a family matter.
Then one day, the unthinkable happened. Janet was returning from lunch on a rainy day. As she stepped into the crosswalk, a speeding car slammed on the brakes, skidded, and…Janet was killed in the accident.
Fred, meet your new partner, Albert. It was a real mess. Fred didn’t have the cash to buy-out Albert and pay Albert 50 percent of what the firm was worth. In any case, without Janet, it wasn’t clear at all what that value might be. At the same time, Fred felt he could not work with Albert. Fred visited a few banks, but nobody wanted to lend him the money to get rid of Albert.
All this could have been avoided if Fred and Janet had a “buy-sell agreement” as part of their partnership. They could have purchased insurance on each other’s lives so they wouldn’t have to be partners with the other one’s spouse, or even worse, their partner’s children. An agreement would have valued their business properly, so there was no long court battle as to what the business was worth to each of them.