By Johan Strydom
While most people acknowledge the importance of comprehensive estate planning as a vehicle for protecting the financial wellbeing of their loved ones if they pass away, the same care is seldom taken by business owners in terms of planning for the continuity of their company should they die.
This type of failure to plan for the business continuity, or the appropriate disposal of your interests in a business, can create massive headaches for any business partners who survive you and even for your spouse or partner after you are gone. And it’s not just these immediate individuals who can be negatively impacted by a failure to plan for business continuity; if your company employs people or has suppliers who depend on it, they can also experience significant financial problems if you don’t have the right plans in place.
While a comprehensive business continuity plan, that forms part of a broader estate planning process, requires the close attention of a qualified financial adviser, there are a number of essential aspects that you must consider if you own, or have a stake in a business.
The first, and arguably most important, aspect of effective business continuity planning is to identify and appoint someone who has the necessary skills, experience and acumen to immediately take over the day-to-day running of the business if you pass away suddenly. Too many business owners simply leave the business, or their share of it, to their spouse or life partner. While this may seem like a logical and easy estate planning decision, unless that partner has been actively involved in managing the business alongside you, it is likely to cause them, and your surviving business partners, untold headaches.
For one, if your spouse or partner has not been involved in your business while you are alive, it is unrealistic to expect them to get involved in it after you die. What’s more, the person you leave your share of the business to may find it very difficult to accurately calculate the fair value of that share should they want to dispose of it. So, simply stating in your will or estate planning instructions that your spouse gets the business could severely jeopardise their chances of getting the sale value you would have liked them to receive.
With this in mind, a much better approach would be to consider entering into an agreement with any business partner you have in which the future ownership of each of your business interests, and the method of calculating or valuing those interests, is clearly spelt out in a legally binding contract. This should also be supported by some form of financing arrangement, which will provide sufficient capital for the buy-out of your business interests should you pass away. This could be as simple as a life insurance contract with an annual escalation for each business partner, but depending on the ownership structure, it may require a more complex legal and financial arrangement that can be drawn up with your financial adviser.
Then, it’s also very important to consider any current or future financial liabilities you have to the business, like outstanding debit loans as well as anything the business owes you in the form of credit loan amounts. In both cases, the executor of your estate will be tasked with settling these amounts, and you need to ensure that you have the means in place to settle debit loan balances without these payments negatively impacting on the people who depend on your estate after you die.
Of course, the opposite is also true, and if you have a credit loan account with your business, the executor will recover this money from the business to add to your deceased estate. Unless you and your business partners have made appropriate arrangements to cover these amounts should any of you pass away, the business could suffer massive financial strain if it doesn’t have the funding required to cover the loan obligations when they arise.
Sureties present a similar risk and if you have stood surety, in your personal capacity, for a business finance facility or credit purchase, it’s very possible that the creditors involved in these transactions will require immediate and full settlement of the outstanding amounts. Your loved ones cannot afford for such surety payments to come out of the money that is rightfully theirs as part of your estate, so it is imperative that you have separate facilities in place to fully cover any such financial responsibilities.
While the above list of business considerations is by no means exhaustive, it highlights the complexities that must be considered by any business owner when doing their estate planning. The simple truth is that a business is, in many ways, a second family – or at least an integral part of the owner’s family live and financial wellbeing. Failing to include careful and thorough business continuity or disposal plans as part of your personal estate planning has the potential to severely diminish the value of an asset that you have most likely put your heart and soul into over the years. On the other hand, spending just a little time and effort on effective business continuity planning is an investment that could deliver excellent returns for the people you care about most.