The Business Will

Whilst the term “Business Will” is a relatively new one, the concept is not.

What a “Business Will” is designed to achieve is perhaps better described by the term “Business Succession Agreement”. This term gives an insight into only one part of the process of planning for the future of a business, and for how an unexpected death, injury or illness might affect the business and its owners.

Where a business is owned by a family or by one or more people, there is always room for a Business Succession Agreement as part of a business succession plan.

A good succession plan will consider:

  • what happens in the event of an “owner” or other key person being unable to actively contribute to the business, because of death, injury or illness;
  • what happens if it becomes a problem for a key person to remain involved – for example, because of relationship breakdown or financial meltdown;
  • what happens if one of the “owners” simply wants out;
  • who can buy who out when, and how (often narrower Business Succession Agreements are called “Buy/Sell Agreements”);
  • how buy outs are to be funded, and how payout amounts are to be agreed and paid.

The Business Succession Agreement is merely the document which reflects what the “owners” have agreed to do in each of these, and other, situations that may arise. The issues that arise for each business and each business owner, and how they will deal with each of those issues, are never the same. However, there are some common issues that all businesses can plan for – namely death, disability, illness and a breakdown of the business relationships.

Some businesses can also have the luxury of identifying successors so that the founders can retire and a “new generation” can take over. Although these issues are readily identifiable, far too few business owners plan for them, often with the result that relationships (and possibly the business itself) are damaged beyond repair in a fight which could have been avoided.

Depending on the industry, and the owners of the business, one of the simplest and most cost-effective arrangements that can be put in place is an insurance-funded Business Succession Agreement. Whilst this is a bit of a mouthful, all it means is that the key people in the business are insured against death, disability and illness for an amount which is usually roughly equal to the value of their share in the business.

If they die or become incapacitated, they can claim on the insurance and be paid out the proceeds, allowing co-owners of the business to take over at minimal cost, and without short changing the exiting owner.

As there are several taxation traps associated with insurance funded buy outs, and the planning can be quite complex, it is important to involve a lawyer skilled at these types of Agreements, as well as your accountant and financial planner.

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