Many entrepreneurs and business owners that I meet show remarkable skills in building up their business interests. However, they tend not to think about what might happen to their families and businesses should they be unable to run them any more due to i
Many entrepreneurs and business owners that I meet show remarkable skills in building up their business interests. However, they tend not to think about what might happen to their families and businesses should they be unable to run them any more due to illness, or worse. Their business might fail altogether in these circumstances without planning a strategy and putting into place documentation to implement that strategy.
Business succession planning need not be complicated. Where there is a planned exit, it is far better for tax planning and business management for the plan to be considered at an early stage. But some circumstances arrive unexpectedly and there is no time to review the implications and put documents into place. The best time to do this is when there is no emergency and business owners can take their time to consider all the options.
A typical scenario is where a business is owned by a number of shareholders or partners. One of them dies and their interest in the business passes to their next of kin. Not only does the value of the share of the business pass but also the interests in the business that the share provides. This may have unexpected and sometimes disastrous consequences.
Generally what the business owner wants is for their family to take the value of the share of the business, but the remaining business owners to take over the share of the deceased owner. This can be arranged by reviewing the governing documents of the business – either the partnership agreement or the articles of association of the company – to ensure a procedure is put in place whereby the remaining owners have an option to purchase the deceased owner’s share of the business, usually with insurance in place to ensure there are sufficient funds. In this way, the remaining owners can purchase the share of the business from the family, using the money paid out from the insurance policy.
A review of the business documents will reveal if there is an appropriately worded provision to put this into effect. If there is not, it is a relatively inexpensive procedure to put this right. In addition to reviewing the business documents, a cross option agreement together with sufficient insurance should then be arranged. This is a technical procedure and there needs to be legal input to ensure that this procedure works with the minimum inheritance tax payable. The legal work needed can be completed on a fixed fee basis.
A review of the wills of the business owners is needed to ensure their family’s interests are protected and that there are sufficient powers to deal with all the possible scenarios that may arise.
A Lasting Power of Attorney can be prepared for a business owner to ensure that if they suffer from an illness which prevents them from managing the business, an attorney can be appointed to ensure that the all business matters can be dealt with in their absence.
This is not a cheerful subject – but important to ensure that business failure does not add to the troubles of a family at a difficult time.
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This article was featured in The Yorkshire Post - 14 September 2010.
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