SME's are South Africa's lifeline, collectively providing millions of people with employment and making a massive contribution to our GDP. It is therefore extremely important that these businesses continue as efficiently as possible, even after the death of the business owner
Unfortunately, not many SME's and family businesses survive the death of the business owner or founder. It has been reported that only around 30% of family businesses survive into the second generation and even less into the third. One of the main reasons: a lack of planning for the transfer of ownership in the event of death.
Here are some important estate and business succession planning considerations for business owners:
1. Employees and business partners need clear guidelines and direction on what should happen if the business owner passes away. The immediate need is ensuring the continuity of the business. Will the business be able to continue smoothly? Is there someone who can take over the immediate management and running of the business? Consider access to bank accounts and ensuring the payment of salaries to employees. Has this been provided for in the Memorandum of Incorporation of the company?
2. A well drafted buy-and-sell agreement is an essential part of business succession planning. Not only will this provide a clear agreement on the future sale and ownership of the business between business partners and shareholders, but also stipulate the value attached to the shareholder's interest. The funding of the agreement with life assurance policies can provide certainty for all parties, considering that there are many factors that could influence other funding solutions, like a finance arrangement. Life assurance will also likely be more affordable for the business in the long run. Keep in mind that if structured correctly, in terms of section 3(3) of the Estate Duty Act, proceeds from buy-and-sell policies, will not be estate dutiable. Buy and- sell agreements are an effective way of ensuring that the family of the deceased shareholder, receives maximum value from the deceased's business interest and potentially also provide much needed liquidity in the estate of the deceased business owner.
3. Business owners often use their own funds to make loans to the business as startup capital. These loans are a liability for the business. On the death of the business owner, the executor of the estate will claim this loan account from the business. This could lead to liquidity problems, especially if the business does not have the funds to repay the loan. Insolvency then becomes a real risk. The value of the credit loan account could also be included in the business valuation and included in the buy-and-sell agreement.
4. Another risk often overlooked by business owners, is the implications of signing personal surety or as co-principal debtor for business loans. On death, this surety obligation is carried through to the deceased estate, which means that where the primary debtor (the business) is unable to pay the debt, the outstanding debt could be claimed from the deceased's estate.
5. Business owners must ensure that they have an updated Will nominating a skilled and professional executor. Dealing with business interests in a deceased estate is complex and the executor will need to be able to attend to all the technical, legal and accounting matters associated with the transfer of the business to the next owners.
Consider this:
The above is not an exhaustive list but highlights some very important considerations that support the continuity of the business.
