News details
It pays to prepare for business life after death
4/1/2010
Alok Dhanda explains why business owners should make succession planning a financial priority.
One of the most important aspects of financial planning for business owners is succession planning. Putting a structured, organised plan in place ensures that fellow employees and family members are not left unprepared in the event of the business owner’s death.
Business owners and entrepreneurs tend to spend too much time concentrating on building up their business without stopping to think about how it would actually survive without them. There are many cases of UK businesses failing due to a lack of a properly thought out succession plan.
For instance, if two directors own a company and one of them died suddenly, this would have an enormous impact on the business. The remaining director would be under a lot of pressure, not only to look after the needs of their partner’s widow and family, but also to avoid plunging the business into further debt.
When considering succession planning, there are all sorts of financial issues to take into account, such as borrowing, overdrafts, salaries, values of shares, and loans. However, this is a complex matter and it is important to seek outside advice from an Independent Financial Adviser, who can develop and implement a comprehensive strategy which covers insurance, ownership and management.
Companies should consider what will happen to the shares of a director or partner if they pass away unexpectedly. Their share agreements may allow for the remaining directors to purchase the shares, but there is a risk that the remaining directors may not have sufficient funds to hand at that time.
A way of avoiding this is to protect your shares through life assurance, which can provide a source of funding where funds may not otherwise be available.
This requires the understanding and agreement of all concerned, to determine how much cover is required, but it is worth the effort for the peace of mind of knowing that the remaining directors will have sufficient support to carry out the terms of their shareholders agreement.
Ask yourself where your money would be better spent – paying high rates of interest on an overdraft, or safely stored in a life policy. Not only would a carefully thought out life policy save a lot of further distress in the event of a tragic occurrence, but would save both the owner’s family and the business from severe financial hardship.
Businesses should not hesitate to consult an IFA who can explain the full range of life assurance schemes and share protection schemes which are available.
An IFA can also advise on tax minimisation strategies, such as placing money in a trust. This type of transition would greatly benefit a widow of a business owner, through enabling them to avoid paying high amounts of tax on loans.
It is never too early to start putting together a succession plan, as nobody can predict what will happen in the future. Take, for example, the sad news of the Wansford helicopter crash in 2007. Four people, including millionaire businessman Philip Carter (founder of training firm Carter and Carter and vice president of Chelsea FC), and his 17 year-old son, were tragically killed. Philip Carter’s company was worth £500 million, employing more than 500 people, but unfortunately went into administration 10 months later.
Real life cases such as these illustrate how tragedy can strike at any time. The earlier you plan for the future, the more seamless the transition process is likely to be.
It is a fact of life that one day, business owners will pass away. Make your succession plan a success by firstly seeking the advice of an IFA, involving family in the process, and making sure that colleagues are fully informed about what course of action to take should the unexpected happen.
For further information on how Alok can help you with your personal or business planning needs, contact Dhanda Financial, 52 Dean Street, Newcastle upon Tyne, NE1 1PG, telephone 0191 255 8960 or email alok@dhandafinancial.com
