How do I plan succession in a business partnership?

Partnership succession planning is mostly a question of what the partners have already agreed in writing. Ontario’s Partnerships Act supplies default rules, and many of them apply subject to any agreement between the partners. This guide uses that Act as its example of one province’s rule, so check the law where your partnership is formed. The aim is to show which questions the default rules leave open, why they matter when a partner dies, becomes insolvent or wants out, and what to settle while all the partners are still in good standing.

What the default rule says in Ontario

Section 33(1) of Ontario’s Partnerships Act says that, subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or insolvency of a partner. The words that matter are “subject to any agreement”. Without an agreement that provides otherwise, a partner’s death can end the partnership for everyone, which the remaining partners may not want. With one, the partners can set what happens instead. Read your agreement for a clause on death, insolvency and withdrawal before you assume anything about how the business continues. Note that s.33(1) names death and insolvency only; s.33(2) adds that the other partners may opt to dissolve the partnership if a partner lets their share of partnership property be charged for a separate debt. Retirement, disability, a dispute or a partner who simply wants to leave are different situations, and the Act’s other rules may apply to them. Some, such as dissolution by notice under s.32, are subject to any agreement between the partners; others are not, including dissolution by an event that makes the business unlawful under s.34 and a court-ordered dissolution under s.35, which includes a partner found to be incapable. A succession plan for a partnership should therefore list every way a partner can leave, not only the one the statute mentions first.

The buy-out option in the partnership contract

The Act also recognizes a tool partners can build into their contract. Under s.42(2), where the partnership contract gives surviving or continuing partners an option to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or their estate, is not entitled to any further or other share of profits; but a partner who, assuming to act in exercise of the option, does not in all material respects comply with its terms is liable to account under s.42. Section 43 adds that, subject to any agreement, the amount due from surviving or continuing partners to the outgoing partner or the representatives of a deceased partner for their share is a debt accruing at the date of the dissolution or death. The practical point is that the contract needs to say who may buy, when, and how the share is priced.

Agree how the share is valued

A buy-out option is only as clear as its price mechanism. BDC notes that a valuator’s figure is just a guideline for approaching negotiations and that even different valuators may not come up with the same figure. So a partnership agreement can name the method, name who chooses the valuator, and say how a disagreement is resolved. Our guide on what your business is worth explains what goes into a valuation. Ask a lawyer to write the mechanism, and ask your accountant how the payment would be treated for tax.

Telling the CRA when partners change

The Canada Revenue Agency (CRA) says a change of partners will have a different impact on your business depending on your partnership agreement. If the structure changes and a partner leaves or one is added, it asks you to call the CRA. In some cases, it says, the business is considered a new legal entity and requires a new business number and new CRA program accounts. If the business was registered using the legal names of each partner, the CRA says its legal name may need to change. Put this call on the closing checklist for any departure.

• Does the agreement say what happens on a partner’s death, insolvency, retirement or disability?
• Is there a purchase option, and who can exercise it, within what time and on what terms?
• How is the departing partner’s share valued, and who picks the valuator?
• How and when is the departing partner or their estate paid, and is it secured?
• Who tells the CRA, lenders, landlords and key customers, and in what order?

Making the plan real

The Canadian Federation of Independent Business (CFIB) reports that formal succession planning remains uncommon and that finding a successor is the most significant barrier. In a partnership, the successor may already be a partner or an employee. If an outsider will buy in, see is buying into a partnership the same as buying shares. Review the agreement whenever partners join or leave, and again when the business changes in a way that alters what each partner contributes. An agreement signed years ago may name a valuation method, a payment schedule or a person who no longer fits the business. Ask each partner to say in writing what they would want to happen if they left tomorrow. Settle any differences that surface in that exercise while everyone is still working together, rather than leaving them for after a death or a dispute.