I recently met with a client and their Accountant to discuss some business succession issues. One of the questions I asked was what happens to the business if one of the owners dies. This led to other questions like:
- Does the deceased spouse go into partnership with the other owners?
- How is the deceased paid out?
- How is the business valued?
- How is the debt of the business paid?
These simple but important questions demonstrate the need to discuss Business Succession Planning and the importance of a Business Will for each business.
Business Succession Planning
The key objectives for effective business succession planning include
- Ensuring the ongoing management and control of the business
- Ensuring the ongoing financial viability of the business
- Addressing the personal requirements of owners
- How will the transfer of ownership be funded?
- What are the Tax Considerations – CGT, GST, Stamp Duty
- How are business debts & personal guarantees dealt with
- Maintain the equity of continuing owners
- Ensuring a smooth transition for all – staff, family & investors
What is a Business Will?
A Business Will is an agreement that usually takes the form of a buy and sell option. It ensures the smooth transition of the ownership of a business on the event of a death, total and personal disablement or trauma of an owner.
Funding for a buy out in a Business Will is critical, and is commonly achieved by appropriately held insurance policies. It is very important to ensure that expert advice is sought when taking out the policies, so that Capital Gains Tax is not triggered unnecessarily.
Advantages of a Business Will
A properly structured Business Will, will have the following attributes:
- It can specify responsibilities, obligations, capital requirements, funding and management
- It will contain compulsory buy/sell provisions
- It avoids uncertainty for business & family as the process is structured and seamless
- It can contain restraint obligations, confidentiality etc
- It allows for a smooth transition of ownership
- Funding by life insurance relieves pressure on the business and continuing owners
- It deals with the event of a shortfall in funding
- It has an agreed formula to value the business on a trigger event
- It contains dispute resolution provisions
Implementation is critical for the Business Will. I recommend the following procedures:
- Conduct an Owner’s Meeting to reach agreement on critical terms like method of valuation, times for payment etc.
- Value the business to determine the level of insurance needed.
- Determine who will own the insurance policy and receive benefits upon death, TPD etc. To ensure the Business Will and the policies are tax effective
- Determine if other insurances are needed such as key person debt, revenue, income protection, business expense
- Inform families to make sure they understand the benefits, implications, procedure etc
- Obtain insurance policies
- Finalise and execute the agreement
- Review business owners existing Wills as they will more than likely need to be updated
Please contact me to discuss any questions relating to this important area or if you would like to prepare a Business Will.
Tagged in: Business succession, business succession planning, Business Will, Buy Sell Options, Capital Gains Tax for Life insurance policies, Death of a business owner, Life Insurance, Total and Permanent Disablement, TPD, Trauma