“True leadership is measured by what happens after you die.” (Myles Munroe)
Most business owners believe that their personal will has the business covered too, but that’s usually not the case.
First things first, your valid, updated Last Will and Testament (i.e. your personal will) must clearly state your instructions regarding the distribution of your business assets in your estate, be they company shares, member interest, or 100% of a sole proprietorship. Without this, your business assets will be distributed under the rules of intestate succession.
But that’s not the end of the story…
Firstly, the actual transfer of ownership in a business, even as dictated in a valid, updated personal will, remains subject to the company’s structure and its governing documents. If the company’s Memorandum of Incorporation (“MOI”) or Shareholders’ Agreement includes specific rules for the transfer of shares upon death, these rules must be followed.
Secondly, a “business will”, commonly called a shareholder’s agreement, a buy-and-sell agreement, or succession plan, is essential. It focuses specifically on the company’s success when you or other partners or shareholders are no longer there.
It should answer questions like who steps in to run things, who is entitled to buy shares, and at what price. And it typically includes insurance to cover the costs of appointing key people and the agreed share sales price when the time comes.
Why you need one…
Having a properly structured (and regularly updated) business will is important because:
- It prevents operational paralysis when the owner is no longer there. Without a clear plan, bank accounts can be frozen, signing authorities revoked, and employees left stranded without leadership.
- It helps to prevent family and partner conflict by eliminating guesswork between grieving family members who inherit paper value and business partners who need operational control.
- It secures fair valuation and liquidity, working with funding mechanisms like life insurance to ensure your estate receives fair market value for your shares immediately, rather than forcing a fire sale.
- It protects your legacy by ensuring the core vision, values, and strategic direction you built are smoothly transitioned to chosen successors.
And why you need to update it regularly
Having an up-to-date business will keeps your business positioned to take advantage of changing tax legislation. A current example is the increased capital gains tax (CGT) exemption for small business owners aged 55 and older who sell their businesses. For many business owners, the sale of their business is their primary retirement asset. The increased CGT exemption means more business owners now qualify for meaningful tax relief when they exit. The exemption is determined on an asset-by-asset basis, and each asset must have been held continuously for at least five years before disposal.
A well-structured and continuously updated business will ensures your succession plan aligns with these conditions so that you and your estate can benefit from the relief available.
Types of business wills
- A shareholders’ agreement can impose conditions on the transfer of shares, often taking into account the interests of the remaining shareholders, such as restrictions and approvals on transfer, pre-emptive rights and forced buyouts. Please note that the shareholders’ agreement must comply with the Companies Act and be consistent with the company’s MOI.
- A buy-and-sell agreement is sometimes referred to as a “business will” because it allows business owners to govern the relationship between the respective shareholders and to outline who will take over their shares in the business and at what price in the event of their death or retirement.
- A succession plan is a strategic business process to ensure continuity by preparing contingency plans for when key people in critical roles leave, retire, or pass away. It’s a good idea to include “key man” insurance to cover the costs involved.
Protect your business and your family
To circumvent the problems created by cash shortfalls, business owners are also encouraged to have personal investments outside of the business. A retirement annuity may be a sensible option since its proceeds generally enjoy significant protection from creditors, although access to the funds is restricted and they should not be regarded as a source of immediate liquidity. A life policy specifically structured to cover business debts can also make a significant difference.
The key is to work with financial, tax and legal advisers who understand the full picture. A business will that is reviewed and updated regularly – particularly when tax legislation changes, business value shifts, or ownership structures evolve – ensures your plan remains implementable and your beneficiaries are not left with a document that no longer fits the reality of your business. The cost of professional advice is small compared to the cost of getting it wrong.
The time is now
National Wills Month is the ideal time to review whether your business is properly protected – and whether your existing plan is still fit-for-purpose.
Our team is ready to review your estate planning, your personal will and your business succession and exit strategy. We will help you structure a plan that protects what you have built.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
© AccountingDotNews