It is never too early to have a plan in place to ensure the continuity or smooth transfer of a business and its assets in the event of the owner’s death. This is especially so if an individual’s family is dependent on the company for income.
Some owners may consider a succession plan as something to look at in the future such as selling the business or passing it on to children at retirement. But some serious thought needs to go into what would happen if they were to pass away suddenly. If the business income is dependent on you and something happens to you, all of a sudden your family has no source of income! The plan should also be revisited on a regular basis as business and personal circumstances change.
How one thinks about this when young and healthy and starting out may differ from when the business becomes established. The size of the business will also impact the approach. If one’s family is dependent on the business and you are a significant contributor, then it’s something to review frequently.
For business owners looking to implement a succession strategy in the event of their death, the first step is to work with accountants and lawyers to understand the organization’s assets and to put the tools in place for ownership to move smoothly and quickly to the intended parties without undue tax or challenge.
Once you have an idea of what the business is, then you can turn your mind to what kind of protection you will need. Is it mostly intellectual property, goodwill or machinery and equipment? How many employees are there? How is it all owned? Is it incorporated and if so, who are the shareholders? If it’s unincorporated the owner might want to consider incorporating it.
After the lawyer, accountant and financial advisor have gained an understanding of the company and what it owns, they can then discuss what the owner wants to do with the business should they die, become disabled, divorced, etc.
Do they want it sold or would they like the family to continue to run it? Possibly they just want to wrap it up, or maybe wrapping up is their only option. What expectations does the owner have for the business after they pass? That will then draw very quickly into who is going to run it, both on a day-to-day basis and at the policy and director level.
While the will is important in the succession process, if the business is incorporated, the governing documents of the company can also be crucial as they indicate not only who is eligible to be a director or a shareholder, but how those positions are filled. Additionally, corporations should have a shareholder agreement that specifies what happens in the event of the death disability, divorce, bankruptcy or other issue with one of the partners.
I had personal experience with the death of a partner as an owner of a farm equipment dealership in Grande Prairie who was killed flying our corporate airplane. Fortunately we had a buy/sell shareholder’s agreement in place funded with life insurance, and the loss of the airplane was covered on our inventory insurance policy. The life insurance made it possible to buy back the partner’s wife’s shares and pay off bank debt. Insurance made it possible to remain in business which otherwise would have been a catastrophe.
Peter Boys CAFA “The Financial Coach”