Succession planning for business partners

Succession planning for business partners

It is very common for non-related people to go into business together, but they rarely think about what will happen to the business if one of them becomes seriously ill or dies. Often this is because they don’t know where to begin or they have a simple Will which they don’t realise is inadequate to deal with their business interests.

A business succession plan will help business owners outline their preferred exit strategy from the business as well as addressing matters such as long-term illness, TPD and death of an owner and securing the survival of the business through transition of ownership.

 

I have a Will, isn’t that enough?

Most people know they should have a Will to deal with their personal assets when they die, even if a lot put off preparing one. From a legal perspective, most Wills will get the job done when it comes to the technical legal transfer of a deceased’s interest in a business. However, the vast majority of Wills do not take into consideration the practical and operational considerations and hurdles that may be encountered for the business or the surviving business partner. Simply ‘getting the job done’ could have disastrous consequences for those left behind.

For example, most Wills leave the whole or substantial part of the estate to a surviving spouse, children, or other family members with little thought as to:

• Whether the nominated beneficiary has the skills, experience, or desire to step into the business and continue to run it in conjunction with the surviving business partner.

• Whether a grieving spouse or child will be emotionally prepared to make business decisions in the immediate aftermath of the death of their loved one. A business generally doesn’t stop running just because someone has died – there are customers to satisfy, bills to be paid and decisions to be made.

• Whether the surviving business partner will be comfortable having to continue to run the business in conjunction with the grieving spouse/children.

• What impact a new owner may have on the clients of the business.

• Whether the business structure is suitable for family to step in (e.g. company vs individuals in partnership).

• Whether the business owners will have the financial capacity to buy each other out if needed.

• Whether it is more appropriate for the business to be sold and the profits distributed.

Business succession planning aims to take a more wholistic look at the business itself, the people running the business, any key employees and family members and aims to end up with a plan which hopefully will ensure that the wealth generated within that business is managed appropriately upon death.

 

What other options are there?

Depending on the type of business and the parties involved, it may be the case that a Will is all that is needed. For example, if the surviving spouse has the expertise to step-in and all parties are comfortable with this arrangement.

However, if the parties would prefer to either buy each other out or sell the business upon the death of one of the owners, then arrangements such as a Buy/Sell Agreement (with or without supporting key man insurance) could be appropriate either instead of, or in conjunction with a Shareholders Agreement (depending on the business structure).

A Buy/Sell Agreement is an agreement which by means of put and call options, binds the continuing owners of a business to purchase a departing owner’s interest on the happening of a specific event such as the death or TPD of one of the owners.

A Buy/Sell Agreement may be drafted in a way that applies to any business structure such as a partnership, a unit trust or a proprietary company, whereas a Shareholders Agreement is limited to just a corporate ownership structure.

Generally, the obligations of the parties under the Buy/Sell Agreement are fully funded by the proceeds of a key-man life insurance policy, providing for the departing owner or his estate to be paid an amount equivalent to the departing owner’s interest in the business in the event of his/her death or TPD. By having the supporting life insurance policy, the remaining business owner does not have to come up with the money to fund the buy-out of the business interest, which otherwise could be problematic, especially for smaller business owners.

The buy-sell agreement also deals with the procedures for giving effect to the agreement such as how the value of the interest is to be determined, how the payment will be funded and how the interest is to be transferred.

 

I started my business years ago, is it too late for succession planning?

No. In an ideal world a succession plan should be in place from the get-go when structuring decisions are being made and shareholder agreements are being prepared.  This will ensure that the business structure aligns with the owner’s proposed exit strategy and avoids a potential restructuring process down the track.

However, it is never too late to start.

Whether your business is in its start-up phase, scale-up/growth phase or is already looking towards the exit phase, a business succession plan can be implemented at any time.

 

How can we help?

If you are considering setting up a business with a partner, or you are currently involved in a business that doesn’t have a succession plan in place, speak to us about steps you can take to protect your interests.  You can contact our succession planning specialists on 07 3023 4800 or at mail@marshpartners.com.au.

You can find out more about working with Marsh & Partners here. As your Absolute.Account.Ability partner we’re on a mission to make your business life better.