For businesses, having a succession plan in place can be crucial in securing the future success of a company. In particular, those businesses that are owned by just a small number of individuals should consider how their business would be affected in the unfortunate event that any of them died.
Leaving it to chance not only places the business you have dedicated an enormous amount of time and effort to building in a perilous position, but could also short change your loved ones in the process. In such situations the value of a will should not be underestimated, providing your family with the security needed during an understandably turbulent period. It is important to shake off the view many have of drafting a will as signing your life away, instead viewing it as an opportunity to address any issues that may have previously slipped under the radar.
But making a will is only the first place to start as it can only deal with your assets that you own and control. It won’t be able to place any obligations on any other parties after you die. For example, it can’t force someone to buy the shares you held in your business. So how would your family benefit financially from the business you built up prior to your death?
Consider: Who do you want to run the business when you no longer can? Will the responsibility fall to your business partner? Do you expect your family to benefit from the value you built in the business while you were working? If so, who is going to buy your share of the business and what is a fair price? The questions may be endless but good planning – to include a will and a cross-option agreement – can provide an answer to them all.
What is a cross option agreement you ask? Practical and cost effective to set up, a cross option agreement gives the surviving business owners the opportunity to purchase the shares previously owned by the deceased. That agreement (sometimes within the terms of a shareholders agreement) can stipulate the price to be paid for the shares, and how the surviving owners will fund the purchase. Typically this is via life insurance, using the proceeds to purchase the remaining shares of the business upon the death of one of the owners.
As always with any formal agreement, there are various technicalities that business partners must consider with when putting such documents in place. For example, to minimise inheritance tax liabilities, such a life insurance policy is often written into trust. It is also important to make clear that the proceeds of any insurance policy can only be used to buy the shares so that the deceased’s family benefits in the way all the owners had planned. A professional will be able to advise you on the best course of action.
For SME’s there is no one size fits all approach to succession planning. Here at Farleys our commercial team have extensive experience advising businesses on long term strategies, protecting the best interest of their business, and also their family. For further information please don’t hesitate to contact our specialist team today on 0845 287 0939. Alternatively please complete an online enquiry form.