Business Succession Planning

Business Succession Planning
Many business owners are often focused on 'today' often neglect planning for the future, and in particular to a future in which they will not play a part. As a result many businesses do not survive beyond the first generation of owners. A proportion of these failures can be directly attributed to inadequate succession planning. A Will gives you the opportunity to ensure that the success of your company continues even in your absence.
Sole Traders
Businesses run by sole traders must be sold as a going concern by the people who administer your estate. Your Executors are usually only granted a 'reasonable period' in which to dispose of your business and it is possible that having to sell in this restricted time period is not in the best interests of your dependents. You should have a Will drawn up appointing responsible Executors and give them an express power to continue the business for however long as necessary. This will avoid a forced sale.
The death of a partner usually dissolves the partnership unless otherwise agreed. It is critical therefore to ensure that you plan ahead and take appropriate legal advice during your lifetime. A partnership agreement should be drawn up to provide for the business to continue after the death of one of the partners, often with an option for the surviving partners to buy the deceased's share.
Limited Companies
If you own shares in a private limited company, the business will automatically continue after your death. However, there may be real difficulties if a major shareholder dies. The business's survival will depend on who manages the company. Shares held in your name are vested in your executor. Your Executors will need to consider whether the company's articles of association or any shareholders' agreements provide any pre-emption rights – the option for existing shareholders to bought out the deceased’s share. The company will need to be informed so that the alterations to the register of members may be made and new certificates issued.
The best way to ensure your beneficiaries receive their entitlement is to see to the proper management of the business immediately after your death and the only way to ensure this is to plan ahead and make a Will. It brings great peace of mind in knowing that the business you have created and worked so hard to maintain will continue and grow, long after you're gone!
Case Study – What can go wrong?
A client passed away who was the sole shareholder and sole director of a Hong Kong limited company. The business employed 35 staff and after the owner died it was effectively unable to operate. No one could pay the staff or the suppliers, none of the management team were authorized to access the company bank account and so business slowed to a point where the company suffered huge losses.
With correct planning a reserve director could have been appointed who would have been able to continue the day to day running of the business along with the correct authorization for the company bank account.
Key Man Insurance
When there are a number of shareholders in a company having life insurance in place in order to buy out the deceased’s shares is often a worthwhile policy. This avoids the problem of a surviving family member becoming involved in the business which can lead to disputes and disruptions.
Cross Option Agreements
Where there are insurance policies in place is it usually recommended to have this supported by a cross option agreement. This often will stipulate a mechanism in order to value the business and also confirms the agreement between the various shareholders and often their spouses in terms of the succession plan for the business.
This article was contributed by Professional Wills Limited. For more information, please feel free to contact Professional Wills Ltd at +852 2561 9031 or Zetland at +852 3552 9085.

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