How estate planning relates to your business.
Many business owners work a lifetime to build up a business of value. The success of the business attests to the hours of hard work, sacrifice and personal commitment it requires to make it work. So that’s enough, right? What risks are lurking beneath the surface that can threaten a business that has been set up by an owner who has taken responsibility for every part of the process of a successful operation?
In this first edition of our series on business risk we cover a broad overview of some of the numerous risks a business owner may face.
Succession planning. Have you given thought to what will happen upon your demise? Often times business owners simply leave everything in their Will to their spouse, unaware that the business interest will be dealt with in the same manner. Suddenly your business partner has your wife as a new partner in “his” business. You can imagine some of the less favourable scenarios that can play out in such a situation. The opposite can also be true, suddenly you have your previous business partner’s spouse to contend with. Traditionally a buy and sell agreement can smooth out the process of transferring one partner’s share of the business to the remaining partners through an agreement. The agreement states the terms and conditions on how such a transfer will take place and can provide the following for all the business partners, their surviving spouses and family members –
- Certainty on what will happen with your share in the business should you pass away
- Mutual agreement about what valuation method will be used to determine the market value of the business
- The time frame within which transfer must take place
- The funding mechanism that will be used to buy the deceased partner’s share.
Having a signed and up to date buy-and-sell agreement is therefore crucial to the successful completion of the transaction. Of course, having the right funding mechanism in place is equally as important. The right cover that makes provision for death and disability can ensure your family receives the value of your life’s hard work while your business partners can continue running the business the way they know best.
Where you are the only person in your business, there is the option of doing a one sided buy-and-sell if you have identified a key employee that can take over your business upon your death or disability.
Retirement. Part of succession planning for your business is to also consider what will happen with your business interest when you retire. When exiting the business, you would want to ensure that you extract the value that you’ve built up during your lifetime. Here you can agree with your business partners or a potential successor on how you will receive your share of the business value – either as a lump sum or an ongoing annuity.
Key person. In your business there’s usually at least one key person – someone that is instrumental in the success of your business due to his/her skill, expertise and experience. Losing such a key employee can have a big impact on any running business operation, especially if it happens at a critical time. This can change the entire risk profile of your entity. Tendering for new contracts or applying for further finance may become a challenge without the leverage of the skill needed to secure a potential deal. Replacing key employees can be a long and expensive exercise, especially if it’s a rare skill or key networking individual that is lost. It is however possible to prepare for such an event by having sufficient funds available to find a suitable person. Provision can also be made to carry the business while sourcing a replacement.
Contingent liability. Somewhere down the line your business may need financing of some sorts. Signing surety for these debts can be a risk to the individual as well as the credit rating of the business. A business can ensure against the debt, saving the individual’s family from undue financial strain and ensuring the business’s cash flow isn’t negatively impacted.
Business overhead protection. Losing a business owner can negatively affect the cash flow of any business. Just because the owner becomes disabled, as an example, doesn’t mean the usual monthly expenses fall away. Salaries still need to be paid, water and electricity and rent is still due. Sourcing income protection for your business can ensure that the regular commitments are honored without disruption when a business owner falls away.
Loan accounts. A credit or debit loan becomes a reality upon the death of a business owner. Suddenly there is a claim that needs to be settled. Provision can be made for repayment of the loan on either death or disability of the owner.
Business expansion. Technically this is not seen as a risk – if your business is expanding, surely that’s a good thing? It means your business is doing well. Consider where funding for expansion is coming from though. Are you financing more equipment? Are you taking on more key employees? There are various ways in which to address your expanding business’s needs with the help of a specialist.
If you need help with a business assessment to see where your business may be at risk, contact Servo Fiduciary Services to help you structure and address all your business needs on firstname.lastname@example.org.