What is business succession?
Business
succession is the process whereby a deceased or disabled co-owner’s
interest in a business is acquired by the remaining co-owner(s). It is
important that the succession process occurs quickly, harmoniously and
with a minimum of disruption to the business itself. At the same time
the process must satisfy the legitimate needs of the disabled co-owner
or the co owner’s estate (as the case may be), as well as the needs of
the remaining co-owners.
Why have a business succession plan?
- To ensure an orderly business succession if death or disablement occurs;
- To ensure the minimum of disruption to business;
- To provide for the estate and family of the deceased;
- To allow for the purchase to be funded, without disruption to the purchaser’s other assets;
- To keep the spouse/executors/children of the deceased out of the business; and
- To minimise the chances of the business having to be sold.
The
unexpected death or disablement of one of the co-owners of a business,
and the consequential financial impact of the event, both on the
business itself and on its remaining co-owner(s), is rightly perceived
by business owners as a significant issue which must be addressed.
A co-owner’s disablement or death can be chaotic for a business. The
need for the remaining owner(s) to make suitable financial arrangements
with the disabled co-owner or with the co-owner’s estate can become a
significant burden for all concerned.
A deceased co-owner’s heirs usually want to realise the true value of
their interest in the business. They may therefore try to force the
sale of the business themselves, even if they have no relevant
experience or ability. On the other hand, the remaining owner(s) may be
forced to take the heirs into active management or urgently find a new
associate to buy out the deceased’s interest. Frequently, there is no
alternative but to sell the business to realise sufficient cash to pay
the heirs out.
When succession planning, owners must be satisfied that if they become
disabled or die, they or their families will receive a fair and
equitable payment for their interests in the business with a minimum of
fuss and difficulty. When considering the situation of the death or
disablement of a co-owner, business owners should ask themselves the
question, “Where will I find the money to pay out my co-owner’s estate?”
Insurance on key personnel will help overcome the financial impact of
replacing a key person within a business structure, but it does not
resolve the financial aspects of business succession. Because most
small businesses tend to utilise their credit lines to the full in
servicing day to day operations, remaining co-owners often have only
limited opportunities to obtain finance from banks or other financial
institutions to fund a buy out.
Key questions for Business Owners:
- What will happen to the business if one of the co-owners dies unexpectedly or becomes totally and permanently disabled?
- Can the remaining owner(s) quickly get together enough cash to buy out the
deceased or disabled person’s interest at a fair and reasonable price? - Will the survivor(s) be forced into business with outsiders or with the deceased’s heirs?
- Will the business have to be sold to realise enough money to pay out the deceased’s estate?
- Can you afford not to make proper business succession arrangements?
Planning for business succession
All too often, clients and advisers have put business succession
in the “too hard basket”, or worse, have put unsatisfactory
arrangements in place. The best business succession solution should
contain two essential elements :
- Appropriate legal documents to regulate the handling of money and help facilitate the succession process; and
- A ready source of money in order to fund the arrangement.
Business succession solutions are often generically referred to as :
- Partnership Protection
- Shareholder Protection
- Buy/Sell Agreements
Individual solutions may vary in content and style from mere cross-ownership of insurance plans, to internally established and controlled trust structures, to intricately funded “Buy/Sell” agreements.
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