Advivo Partner, Dale Edwards, shares insights into why you need to make estate planning considerations even if you don’t have a family business.
In this blog, we are talking about the relevance of estate planning to businesses that have several, unrelated owners. These are common and have two or more owners who have worked together in their business for some time, often a long time. These owners get along together (they wouldn’t still be in business together if they didn’t) and all bring different skills to make their business stronger and more successful than it would without their combined talents.
How is Estate planning relevant to this scenario then?
The relevance lies in what is planned to occur (or worse, unplanned) when something adverse happens to one of these owners. This does not just mean death but also can include a mid- or long-term incapacity.
What can go wrong?
- The business can struggle to perform without a key decisionmaker.
- More pressure will fall on the other owners to step into the gap whilst still performing their own role.
- The missing person may have a skill set that can’t be replaced by the other existing owners, necessitating a search for external talent to bring into the business either as an employee or another owner. This may even be so dire as to cause the business to have to recalibrate what and how it operates if these skills cannot be replaced.
- Key creditors or financiers of the business may decide that the absence of one of the owners means that they want to change the existing arrangements that the business has with them, putting commercial or financial pressure on the business.
- An outsider to the business, being the spouse, children or other persons connected to the business owner suddenly has an interest in the business and upsets the harmony that has existed between the owners for years.
- This outsider may not care about the longevity or legacy of the business and only see dollar signs that will destroy the business.
Mitigating the risks
Whilst some of these elements cannot be completely avoided, there are steps that can be proactively adopted by business owners to mitigate the negative outcomes of some of these elements. When there is a clearly documented, agreed process detailing what is to happen then those involved can follow that process and there is less likelihood of the sort of disagreements that are caused by a lack of a formal plan and a belief by different parties that things should be done in different ways.
The first important document is a shareholder’s agreement (called by different names depending on the business ownership structure). This is a document specific to the business that sets out the rules by which the owners agree to interact with the business and each other. You could say that these are the “rules” of the business.
Another important document is called a buy-sell agreement. This is a binding contract made by the co-owners defining what happens if one of them dies, becomes disabled, retires or leaves the business. This will include an agreed-upon method of valuing the business and ideally set some timeframes to try to ensure that the process does not drag on for too long, to the detriment of the owners as well as the business. This also sets out who gets the first opportunity to buy the shares owned by the existing co-owner, and any order of opportunity after the first.
Buy-sell agreements are commonly combined with insurance policies that insure the life of each owner with the policy beneficiary being the business. This insurance provides funding in the event of the death or disability of an owner for the business to be able to fund paying out that owner’s estate for their share of the business, without putting undue financial pressure on the remaining owners to find the money to pay them out.
The benefit of these agreements is that a challenging time for all involved is made easier because there is a plan and a mechanism to resolve the situation that was agreed upon in advance when nobody was under the pressure of the circumstances. This means that it will be more likely to achieve a good outcome for all parties.
Do you have these aforementioned arrangements in place in your business? Talk with one of Advivo’s expert Business Advisors if this is something you need to implement.
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