Mr Tan has been deeply troubled for the past few months, suffering from lack of sleep and overworking. His partner, Mr Goh, died due to an unfortunate car accident. Now, Mr Tan has to run the business while coping with huge pressure from the customers, suppliers, bank and employees.
He had to make changes to the routine operations once carried out by Mr Goh. He also has to take over some of Mr Goh’s responsibilities while at the same time, delegate some tasks to senior employees. During this time, he has to look for a replacement to take over the many tasks that Mr Goh used to do. He also has to make changes to the Board members and the bank signatories, as well as access to the regulatory authority.
Worse still, he must now deal with the family of Mr Goh. In a letter from a lawyer representing the estate of Mr Goh, his family is demanding that the company continues to pay the family the income that Mr Goh received while he was alive. They demand for the continued use of the car and driver that the family had been enjoying. In addition, they demand for the immediate payment of the death benefit payable as the Company had already received the claims from the insurance company. They are also demanding to either transfer the shares to the family members, or to be allowed to buy over the shares of the deceased. They also want to have a representative on the Board and to be one of the bank signatories.
Mr Tan has every intention to buy over the shares owned by Mr Goh but he does not have the necessary cash flow to pay, especially since the family is demanding a sum much higher than the preserved market value. He does not want the family members to be on the Board as they have no experience in running the business. Upon the advice of the lawyer, he is not prepared to make any payment to the estate as the Executor has not obtained the Grant of Probate.
The above scenario can and will occur when a partner or shareholder dies or is totally and permanently disabled. In fact, there are many real-life instances where businesses had to close down after the death of the shareholders; not due to the lack of profitability or inability to continue the business, but rather due to the dispute among the estate and the surviving shareholders with regards to the shares held by the deceased shareholder.
One crucial step to prevent these issues from happening, is through a Business Succession Plan. Let’s see what could happen to a company without it.
- Business operations will slow down or come to a standstill, as surviving shareholders spend time and effort sorting out matters with the estate of the deceased shareholder. Negative publicity that results from this may impede the future direction of the business.
- Business growth may stagnate. Customers may lose confidence in the business. Employees may lose confidence and some may leave the company.
- Competitors may mount hostile takeover bids on the business.
- The business itself may shut down.
Without reaching an agreement on the sale and purchase of the shares, what unsavoury scenarios will befall the surviving shareholders and the estate of the deceased shareholder?
- Family members who have inherited the shares of the deceased shareholder will want the highest possible price.
- Family members who have inherited the shares of the deceased shareholder may not want to sell their shares.
- The surviving shareholders will most likely offer the lowest price for the shares.
- The surviving shareholders will have to spend time liaising with the estate of the deceased, instead of focusing on running the business.
- Conflicts may occur between family members and surviving shareholders.
- There may be delays in the settlement of estate of the deceased shareholder.
This may lead to long and arduous disputes over the disposal of the deceased’s shareholdings in the business.
What are the benefits of a Business Succession Plan?
With an agreed procedure put in place with regards to the transfer of shares due to the death or total and permanent disability of any of the shareholders, it provides the following benefits to the various parties involved:
For the Deceased Owner
- Ensure that the estate has the fair value of the business that he has invested over the years; and
- Ensure that there is a ready buyer with the cash to buy over his interest in the company.
For the Surviving Owner
- Ensure that deceased’s interest will not be sold to third party; and
- Ensure that funds are available to purchase the interest of the deceased.
For the Business
- Enable business to continue without any disruption; and
- Enhance confidence of the debtors, creditors, bank and employees.
Business Succession Planning will usually take one of the following approaches:
#1. Family members of the deceased shareholder take over the shares.
This is the most common way if there is no prior agreement in place. The main challenge is the ability of the family members to replace the role of the deceased shareholder. Otherwise, frictions and conflicts will be common. This approach is preferred if the family members are already in the business. This method also happens when the deceased shareholder holds a majority shareholding in the company.
#2. Majority shareholder buys from minority shareholder
This happens when one of the shareholders is a majority shareholder and he is not keen to sell his shares to the minority. To ensure that the minority shareholder gets his fair value, the minority shareholder agrees to sell to the majority shareholder.
#3. Surviving shareholders buy from deceased shareholder
This happens when none of the shareholders holds majority shares in the company and when there is no family member keen to take over.
#4. Deceased shareholder sells to employee.
This is used when none of the above arrangements is suitable or in cases where the surviving shareholders value the contribution of this employee.
#5. Deceased shareholder sells to third party.
This is used when the third party is in the same or complementary business, and no shareholder or employee expresses keen interest to take over.
To ensure that the estate of the deceased shareholder gets the value of his shares agreed on, it is common for the shareholders to purchase insurance to fund the sale and purchase.
With insurance put in place:
- The buyer is assured that he has the money to buy over the shares; and
- The shareholder has peace of mind knowing his family members will get the fair value for the shares owned by him, and do not have to tussle with the surviving shareholders.
With a properly structured agreement on business succession, it is a WIN-WIN situation for all. The surviving shareholders do not have to deal with the estate of the deceased shareholder. The estate of the deceased shareholder is guaranteed with the value of the shares and will likely not enter into conflict with the surviving shareholders.
If you are keen to know more about Business Succession Planning, do speak with someone you can count on to help you.
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