Business Advice & Growth Blog | The Alternative Board

What will happen when you die or something else inconvenient happens?

Written by Ed Reid | Aug 27, 2019 9:02:57 AM

Leaving aside physical decay and any after life scenarios, what else will happen when you die? Specifically, as a business owner or leader, what will happen to your business? Do you know? How will employees be affected? What about any business partners or fellow directors? Your customers? What will your next of kin and/or family need to do, and critically, what will they be able to do?

In short, do you have appropriate succession and continuity planning in place in the event of your untimely demise, or incapacitation?

For those who answer, ‘no,’ ‘don’t know,’ or ‘not entirely,’ perhaps the most important point to make, is this: you need to give this matter some attention. Amongst all the other demands of running a business, this is an area that can be overlooked or given low priority on the basis that it will not happen (or at least not within the owner’s tenure). But it can, and it does, and the consequences of not having put a plan in place can be significant.

So, what is it you should be considering?

Here is a quick checklist (not necessarily exhaustive) of some likely important factors:

  1. Have you determined what you want to happen to your business should you die or be incapacitated, and are you in alignment on this with others affected – especially other business partners or shareholders and your family or beneficiaries?
  2. Do the instructions in your Will reflect this, and, if your business is a Partnership or a Private Limited Company, do you have formal agreements in place that enable or allow this?
  3. Have you taken out appropriate insurance – e.g. key person, share protection insurance, life insurance - to ensure that things run as smoothly as possible, and the financial impact on others is managed appropriately?
  4. Do you need to grant Lasting Power of Attorney to an appropriate individual or individuals?
  5. Have you thoroughly documented processes and key information required to run the business (including passwords) in your absence? Do the relevant key people know this, or at least know where it can be accessed?

A little more detail:

What do you want?

What would you want to happen to the business if you were to die? Would you want it to carry on? Who would you want to run it? Would you rather it was sold as a going concern? Or is your aim for your fellow partners or directors to ‘buy you out?’ If you are incapacitated would you want someone else to step in and run it? Who? What would they need in order to do this? These are the kind of issues that need clarity and should be agreed with business partners and family.

Wills and Agreements

You will need to take at least one or two steps to ensure your wishes are fulfilled. One of the key ones, is having appropriate instructions in your Will, and/or having an appropriate legal document The legal status of the business makes a difference, and it is important to take legal advice about Wills, Partnership Deeds (for Partners) and Articles of Association and/or Shareholders’ Agreements (for Private Limited Companies). Issues such as frozen bank accounts can be avoided with the correct advice and legal documentation. And it is possible to specify who has preferential purchase rights, in the event of your demise. These documents should be reviewed reasonably often to ensure they still meet everyone’s requirements.

Insurance

What about the financial implications for those that might want to take on your stake, and what about the financial hit the business might take in the event of your incapacitation? In both cases, you may wish to consider insurance. Share protection insurance (typically used in conjunction with a cross option agreement) enables the remaining stakeholders to have the financial means to purchase the deceased’s stake in the business. Key person insurance can cover the death or extended incapacitation of a key member of the business (this can, of course, include the owner or owners). Life assurance is something that many business owners will have in place for personal and family reasons but reviewing it at times, in light of business obligations, can be sensible.

Lasting Power of Attorney (LPA)

With regards to incapacitation, granting Lasting Power of Attorney (LPA) is something to consider. The Attorney can make decisions on your behalf, including buying and selling property, accessing, opening and closing bank accounts, investing assets and dealing with tax affairs. This can be critical to keep the business trading during your absence. It is important to ensure that the wishes in the LPA are consistent with Articles of Association and/or Shareholders’ Agreements, and vital, of course, to identify a suitable person to be the Attorney (someone you trust, who, ideally knows your business and is capable of doing your job). Again, it is sensible to consult an appropriate law firm.

Documentation

Finally, how confident are you that if you were not able to come into your business tomorrow, that everything needed to continue running the business (including an Attorney picking it up) is documented and accessible? How about passwords to critical documentation, bank accounts and key software? It’s worth spending a little time (and getting key staff to spend a little time too) documenting processes and any insight that might be helpful to someone filling your shoes for a while. Of course, this will also be valuable later, when you’re considering exiting the business in a happier way.

So, if you don’t have a clear plan in place to cope with your sudden absence from the business then some key things to consider are: what you (and others) want to happen; the legal documentation to enable this, what insurance you want; whether to grant Lasting Power of Attorney, and documenting how your business works.

 

To read more about the why it’s essential to plan for your exit, click here to read a chapter of our ‘Timeless Principles’ book: ‘I don’t need an exit strategy’.