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The Document That Everyone Wishes They Had Written When It's Too Late
- AuthorChris Shaw
I am always surprised at the number of business owners that I talk to who have not considered the impact that the unexpected death or critical illness of one of the owners would have on their business.
Many have successful businesses and are understandably pre-occupied with the day-to-day running of their business, but more often than not haven’t made the necessary arrangements to enable their business to continue should the worst happen.
Nobody wants to dwell on bad news, but like many things in business, a plan of action will be the best document you have ever written should the time come.
So, where do you begin? Here is a very typical example of the situation faced by many SMEs and the actions that they should take to ensure that their businesses are protected:
Two brothers each own 50 percent of the shares in a successful engineering company that has traded for many years. Each brother is married and has young children. It is the intention of both brothers that if they were to die or become critically ill the cash value of their business interest should be paid out to help maintain their families. However, there is insufficient free capital in the business to allow this to happen. The brothers also wish to retain control over the succession of the business because in these circumstances they fear:
- All of their hard work going will go to waste as the business may have to be broken up and sold off
- The business may have to borrow substantial sums to fund the purchase, placing undue pressure on the continuing brother.
- The continuing brother may have to hand over 50 percent of the profits to the other brother, or his estate, having possibly no involvement in the business.
- The late brother’s family may attempt to sell the interest to a competitor or may try to become involved in the business, but lack the expertise needed
Wills & Inheritance Planning
Making a Will may seem like an obvious first step, but only approximately 70 percent of the population die without having made a Will. As a result there are a significant number of business owners who have not taken this step to ensure their business interest passes to their loved ones. Inheritance tax planning also needs to be considered together with the availability of business property relief, which can help to save significant amounts of inheritance tax.
Key man insurance policy
A “key man” insurance policy should be put in place to provide a sum equivalent to the value of the business interest in the event of death or critical illness. The policy should be placed into trust and the business owner can appoint their fellow owners or partners as one of the trustees. The policy proceeds will be paid to the trustees and used to fund the purchase of the critically ill or deceased owners business interest.
Cross option agreement
To sit along side the “key man” insurance policy, a business owner should also enter into a cross option agreement. Such an agreement grants a binding option to the continuing owner/partner to force the deceased’s estate to sell the business back to them. In the event that the continuing owner/partner fails to execute this option the agreement can grant an option to the deceased’s estate to force the continuing owner/partner to purchase the business interest. The agreement should set out the terms for payment, allowing the continuing party extra time to pay any monies over and above those received from the “key man” policy.
Similar arrangements can also be made in the agreement if one of the party suffers a critical illness and could not continue to work in the business.
Lasting Powers of Attorney
Finally, each named owner should put in place a Lasting Power of Attorney to appoint one or more individuals to deal with their affairs in the event that they were unable to do so themselves, as a result of a physical or mental disability.
By taking such steps all parties can ensure that there is continuity of their business, while maintaining financial security for each party in the event of death or critical illness.
They say that old ones are the best ones and in this case it is certainly true. As a wise man once said: “Failing to plan is planning to fail”.
Chris Shaw is an Associate Solicitor within the Lifetime Planning Team, which is recognised as one of the leading Private Client legal service providers in the South and West Wales region. Chris is very pragmatic with a proven track record of building client relationships, owing to an ability to communicate effectively and calmly. Chris feels that it is important to build a good rapport with all of his clients. Chris Shaw is singled out for praise in the Legal 500 2012 edition for his expertise in Personal Tax, Trusts and Probate.