As a business owner you may have a business strategy in place to grow your business, a marketing strategy in place to promote your business, but have you created a strategy for the business to continue in the event of your death?
Admittedly it is a subject that you may find uncomfortable. However, it is a subject to consider. This is because there are other people besides your family, who will be negatively affected should something unexpected happen, who are reliant on your business and the income that your business generates – these include employees, partners, stakeholders, banks, customers, and suppliers. In the words of Benjamin Franklin,‘If you fail to plan, you plan to fail.’ You need to be proactive in your preparations so that you protect your dependents – family and workwise.
Let’s look at the very necessary steps that you need to take to protect your business and your family in the event of your untimely death.
Make a Will
You have two options: you can leave your family in a state of limbo and uncertainty,or you can make clear arrangements so that they can execute your wishes. Making a will ensures that there are far fewer complications should something happen. Intestate means that you die without leaving instructions (a will) as to how you want your assets to be distributed after your death. This will be the outcome if you do not plan accordingly.
For young people without many assets, a will can be a simple document will be sufficient, but as you get older and you acquire more possessions and make further financial investments, you will require the services of a specialist advisor for complex estates. It is always advisable to regularly review your will, especially after the following:
- A child is born
- The death of a loved one/beneficiary/executor
- An inheritance
- A medical diagnosis
You need to think about who you want your beneficiaries to be, and you will have your reasons for the choices that you make. It is advisable to divide your estate in terms of percentages, rather than fixed sums. This avoids any issues around beneficiaries being paid more than perhaps the main beneficiaries such as spouses if a change of circumstance occurs before death – paying out fifty thousand dollars to your favorite charity is a generous gesture, but if there are only sixty thousand dollars in the estate, your spouse may be left in a difficult position.
Other than deciding on beneficiaries, you also need to consider who can represent you – who will you choose to be your personal candidate? Being a personal candidate is a huge responsibility, and your decision should not be made lightly, especially when they will have to administer your assets. Your first thought may be to have your spouse as Trustee to manage your estate, but they may not have the necessary skills or emotional resilience in a time of grief to make the best decisions. Do you know your trustee is the right choice? There are various considerations for you to contemplate:
- Resources needed
- How reliable is the individual or company?
- Are they likely to outlive you?
A will is the only way to protect your assets, your family and business partners and ensure that your assets stay out of the probate courts.
Make A Succession Plan
Less than 30% of small businesses have a succession plan in place. Without careful planning, when you die your business will become an asset of the estate. Not only could this have serious tax consequences for the beneficiaries of the estate, but it can also be of major concern to any business partners that are left holding the reins. This can have a severe effect on businesses:
- Interruption to business
- Loss of clients and customers
A significant share of the business could be passed to beneficiaries who lack the skills or interest that the business needs. You need to consider the wider picture – would anyone in your family want to continue in your business footsteps? Do they have the required skills? Would your partners even want to work with anyone else other than you?
Succession planning is essentially an exit strategy that is designed to make the transition from a business (either through death, retirement or through disability) as smooth as possible for all parties. A well set out succession plan helps to minimize the risk of disagreements by having agreed actions that will be taken in the event of the death of a key member of the business.
Your succession plan needs to be both realistic and achievable. There are no set rules about succession plans, you can tailor it to suit your needs, but here are some areas that you should consider:
- Do you intend a partial or full succession?
It may be in the interest of your beneficiaries if only partial succession takes place. This means that they may have a reduced ability to influence the business but still have a vested interest.
- Succession timetable
You need to have a clear timetable for your partner and beneficiaries to work within. There is little more damaging to a business’s reputation than procrastination. List the actions that need to be taken and the start date and end date – obviously, you don’t have that information, but rather refer to the dates as week 1 or week 7, for example. Be mindful that the people will invariably be mourning, and so it can be counterproductive to have tight deadlines.
- Are there any restrictions to be included?
The restrictions that are included within the succession plan can be a summary of the formal legal agreements that have been made. For example, if you have agreed to a partial succession, you may want your family to be involved in making branding decisions.
- Legalities: a buy-sell agreement and will.
A buy-sell agreement states that on your death, your business partners can buy out the shares from the estate or vice versa. Essentially, your death triggers a sale of the business. The buy-sell agreement will determine who can buy the shares of the business, the circumstances for the sale being triggered (can also be due to disability and retirement as well as death) and the price of the business.
- Financial: sale price and tax implications.
You need to approve on how the business will be valued if a sale is agreed to be the most likely route in the event of death. The problem with unexpected sales is that you have no control over the economic climate at that time – if your succession plan is strict about selling, you may find that a forced sale means that you get less than the business is worth. Build into your succession plan a section for risks such as the expected business sale price value not being met and agree alternative actions as a contingency. You need to seek specialist tax advice on the implications of a sale to your beneficiaries – you may find that a partial succession will diminish the tax burden.
It feels slightly macabre to be making plans that can be implemented for after your death, but it is a necessary part of building a future for your family and business. When people are affected by grief, they are often unable to make decisions that will have a positive outcome for them. By planning, you are ensuring that your family and business are protected from uncertainty.