How would your business be affected if you, or your business partner, died unexpectedly? Have you taken the right steps to protect your livelihood?
Dennis Lawrence, estate planning expert from the Will Partnership, explores the potentially shocking consequences of the death of a business partner, and outlines a simple and inexpensive 3-step solution known as a “Business Will” to ensure business continuity and prevent disaster.
Small business owners, myself included, don’t really like to spend our time dwelling on what might happen, like the untimely death or incapacity of a business partner. Instead, we’d much rather focus on the things that increase turnover, or improve the quality of service to our clients.
However, what I’ve discovered in my line of work is that there are some things that, as a business owner, you simply can’t afford to ignore; where burying your head in the sand and leaving things to fate is a highly dangerous choice.
Here is a typical chain of events I’ve put together, from several real cases I’ve come across, to show what can happen when a business partner dies without a Business Will in place. It’s a local hairdressing salon we’ll call “Hair Today”:
· Hair Today is a profitable limited company, founded and owned by two brothers, Joe and Jack, each with an equal 50% share.
· One of the brothers, Joe, unfortunately dies in a car accident whilst driving to work. Joe was 48, and he had not prepared a Will.
· Joe’s long-term partner Jane is entitled to nothing from his estate, as no Will was in place. Jane is therefore forced to make a legal claim (using the Provision for Dependants Act 1975) the entire cost of which, win or lose, must be paid for by Joe’s estate.
· The lack of a Will also means that Joe’s two children, from his previous marriage, are legally entitled to the whole of Joe’s estate under the Rules of Intestacy. The children therefore decide to challenge Jane’s claim.
· The legal fees involved are substantial, and Joe’s share in Hair Today has to be sold to cover them. Family relationships reach breaking point.
· To avoid losing half the company to an unknown third party, Jack is forced to take out a large company loan to buy back Joe’s share from his estate.
· Joe’s estate dwindles due to escalating legal fees, and Joe’s children are eventually forced to settle out of court. What remains of Joe’s estate is now a mere fraction of the substantial legacy that he had spent his life building and his family feel they can no longer speak to each other.
· Hair Today is left with an enormous debt it cannot afford, eventually forcing Joe’s brother to close the company and declare bankruptcy.
Of course this case is unsettling to read. Maybe you are even feeling shocked or even angry after reading it? For me the overall emotion I feel is frustration because I know from experience that things would not have escalated like this if Jack and Joe had used a simple three-step strategy, one that would have not only avoided disaster, but also would have enabled Hair Today to continue completely unaffected by Joe’s death. This three-step strategy is what I refer to as a “Business Will”:
Step 1: Shareholders Agreement (or Partnership Agreement for an LLP).
This document outlines what happens if one of the partners dies, becomes incapacitated, leaves the company, etc. Each event automatically triggers an agreed action. In the Hair Today example, Joe and Jack would have included a phrase like “…in the event of the death of a shareholder, the deceased partner’s shares must first be offered for sale at market value to the company to ensure continuity of the business.”
Step 2: “Key Man Insurance” (and Cross-Option Agreement)
Typically paid for by the company (hence tax-deductable), this life policy pays out the market value of the deceased partner’s shares in the event of death. So in the case of Hair Today, the funds would have been available for Jack to repurchase Joe’s shares from his estate, thus ensuring the integrity of company ownership whilst allowing the business to continue unaffected. The Cross-Option Agreement just commits the company and the deceased’s estate to this arrangement.
Step 3: Your Will
The presence of an up-to-date, inexpensive Will takes control of the whole situation, ensures that the family is adequately taken care of, and dramatically reduces the risk of a damaging and expensive family rift that may never be repaired. In Joe’s case, the Will would have been the key document. Without it, his family felt they had no choice but to fight through the courts, which escalated into an unpredictable and disastrous outcome for both his family and his business, an outcome that Joe would never have wanted of course.
How likely is the Hair Today scenario in reality?
It’s a fact that over 60% of the adult population in the UK do not have a Will (source: This is Money), and in my experience, those that are in place are often incorrect or out of date, so Joe and Jack’s example is pretty typical. As business owners, it is even more important that we plan our estates effectively – it’s not just our family’s lives at stake, it’s our business partner, their family, our employees and their families too. All of them depend on us as business owners to get these things right – after all, a death in the family is stressful enough.
How much does a Business Will cost?
It depends on the complexity of your company, how many people are involved, and of course the level of fees charged by the professionals you choose to help. For most small businesses, I usually find that only a small investment is needed to get things in place – truly negligible when compared to the risks outlined above.
How do I get my Business Will is in place?
First get some expert advice about your situation so you can decide what you really need. You can either contact an estate management expert like me for specialist advice, or alternatively speak to your solicitor to see if they can help you.
As I hope this article shows, I have a passion for helping fellow small business owners avoid the Hair Today scenario, so I’m happy to offer my advice completely free without obligation. If you would like to make sure your business is protected, I’d be delighted to meet you for a coffee to see if I can help. Contact me at firstname.lastname@example.org