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01 July 2017

Hamilton based Partner, Nicole Carson, has a real interest in helping small and medium enterprises establish, maintain, and review business succession plans.  Nicole takes a collaborative approach with owners and this includes working in tandem with the clients trusted advisors in other fields, such as their accountant, insurance advisor and bank manager, to ensure a cohesive plan.

A good business succession plan is a roadmap to assist owners prepare for the expected (retirement, transition of ownership to next generation) and the unexpected (death or exit of a key person, separation, changes in business value).  It should be a collective vision with clear goals and objectives, trigger events, and set time frames for actions and decisions.

The foundation tools for a business succession plan are varied and dependant on each particular situation.  But every business owner would be wise to start with the questions:

  • What are the short, mid, and long term business goals?
  • Who are potential successors?  (family, internal promotion, external?)
  • How will you exit and when? (expected circumstances)
  • How will the business be valued on your exit?
  • Do you require ongoing income from the business after your involvement ends?
  • How will your buy out / exit be funded? 
  • Is there a well thought out insurance policy to meet some of the unexpected risk?
  • What will happen in the case of a trauma, disablement, or death? 
  • How will your family be impacted financially when you exit the business?
  • Are exit payments structured correctly to meet tax objectives?
  • What written agreements are in place to demonstrate the succession plan?
  • How often is your succession plan reviewed? 

Here’s a simple scenario that could happen to many business owners who don’t have the proper planning in place.  Two friends own a bespoke joinery business.  They are equal financial partners and equal in terms of the work they do in the business.  They have life insurance policies which they jointly own over the other.  After many years in business and when nearing retirement, one owner unexpectantly passes away.  The life insurance policy is paid out to the surviving owner shortly after the death.  The surviving owner collects the insurance proceeds and continues working in the business.  Prior to his death, the deceased owner told his widow that the insurance proceeds were to be used to pay out his family his share of the business.   The widow approaches the surviving owner but there is no written succession plan or signed agreement to show what the parties intended.  After much negotiation and many months later the surviving business owner agrees to buy out the widow but there are still a number of hurdles.  The first is that the parties cannot agree on the method of valuation and the differing valuation reports provided.  The second is that the insurance policy was not reviewed annually in line with the increasing value of the business and the insurance proceeds are not enough to but out the deceased owners equity.  The surviving owner has limited means to borrow the additional funds needed.  The prospect of a business sale was tabled but the market for a third party buyer was unattractive as can often be the case in a closely held business.  The surviving business owner is not a bad guy, the two families had become close over their many years in business together but he was also in an uncertain position trying to keep the business afloat after the loss of a key person and trying to protect his own financial stability.

The uncertainty, stress, and costs to both families could have been avoided had the owners sat down and road mapped out their business succession plan, putting in place the paperwork and solutions necessary to take care of themselves and their loved ones in the event of an unexpected exit.