Wills and Estate Planning
Succession Issues for Owner Managed Businesses
Part I
This (and next month’s) articles will examine succession issues for owner managed businesses.
Small business owners are busy people and not every business owner will have incurred the time (or desired to incur the expense) to create an effective succession plan.
Unfortunately – serious health issues or, sadly, a tragic accident can result in considerable responsibilities that successors are often left to deal with ongoing, or unresolved, business issues and make tough business succession decisions. (This is an area where DIY financial (business) planning is not recommended)!
The following provides a brief overview of the immediate steps executors, and their advisers, need to consider where the estate has a majority interest in an operating company and a succession planis incomplete.
The need for prompt action is fundamental.
The Will
First step is to review the Will and consider:
· Are shareholdings specifically bequeathed or are they to be sold and proceeds divided amongst the beneficiaries?
· What specific powers are incorporated in the Will to deal with the Company?
· Are the executors directed to convert (any shares) into cash or can conversion be postponed?
· Does the Will provide instructions with regard to appointment (or retention) of experts to assist the executors in carrying out their duties?
· The options are probably: wind up, sale or share transfer.
A basic point – often overlooked - is that executors generally have no power to continue business interests of the deceased unless there is specific authority, within the Will, for executors to continue such business interests of the deceased – whether as sole proprietor or as a limited company: (where partnership interests are involved the partnership deed should include provisions as to the death of any individual partner).
Information gathering
Executors should contact the following:
· Beneficiaries
· Solicitors and Auditors
· Bankers
· Employees – whilst a source of basic information as to the internal organisation; business viability and ability to highlight immediate issues affecting the business; extreme care is needed, as to employment contractual issues, as theexecutors may berequired to serve appropriate notice
Administrative Issues
Executors are under a fiduciary duty to preserve assets –the following are basic criteria to attend:
- Insurance – business assets: public and third party liability, any employees compensation, insurances are all in place; the interest of the executors noted, with the insurance company, in the correct time frame.
- Cash control – absolutely paramount! Who has continuing authority to sign, within the bank mandate, and control the cash? Are there control procedures to prevent error or fraud? The executors can delegate cash management but ultimately they are the persons answerable to the beneficiaries.
- Tax filings – essential to be timely and that all filings are up to date
- Interim Manager – the executors can appoint an individualto run day to day matters-perhaps a trusted senior employee or family member acquainted with the business. Time again is crucial to make any appointment early following death of the owner.
Business considerations:
Executors would need to consider quickly (or seek expert advice upon):
· Perishable inventory
· Protection of goodwill
· Suppliers
· Contractual obligations
· Regular customers
· Outstanding payables
Selling the business
Unless otherwise stipulated within the Will, the executors should take steps to convert the asset within a reasonable time. What is reasonable –depends on the circumstances and the executors maywell have tooversee operations for some time.
The executors are responsible to ensure assets are preserved and the business remains viable until a sale is finalised.
Next month- business valuation and Inheritance Tax aspects.
Andrew Murdoch (ACIB, AIFP, Dip PFS, TEP, Solicitor)
The content of this article is only intended as information and should not be considered as legal advice. Andrew Murdoch cannot be held liable for any loss caused by any act or omission as a result of information in this article.
