Succession or Sale? – HR’s Role In Advising Business Owners On Inheritance Issues
This second post explores the opportunity for human resource consultants to advise small business owners on the future of their business, after their deaths. We’ll look at the important question of succession or sale after the owner’s death. It’s a rather long post, but there’s a lot to consider.
Before any planning can begin, it’s vitally important to get an up to date assessment of the business’s current value and future prospects, as financial viability will determine what options are available to business owners.
Succession or Sale?
The first decision to be made about the future of a business is whether it should be retained or sold, based on financial viability, the suitability of people wishing to take over its stewardship and the current owner.
If the business is losing money and has no prospect for future recovery, it may be better to close it sooner rather than later. The cost of shutting down a small business and any debt it has incurred, will be met by the deceased owner’s estate. As creditors receive preference over those who are left a legacy in a will, they will receive their money first, leaving beneficiaries empty handed. However difficult it may be emotionally, it may be better to close the business now and manage the impact of the resulting debt. Assuming the decision is to dispose of the business, and it is financially viable, it’s relatively straightforward to make arrangements in the will to sell it.
But if succession is a possibility, there’s a number of important factors to be taken into account:
- Who would want to continue running the business? Owners often consider their children to be natural successors, but they may have no interest in taking on the responsibility of managing the business.
- Who has the skills, knowledge and reputation? Although a willing successor is always preferable, but they may not have the profile, competence or experience to make the business work.
- Is it important to keep the business in the family? Has the business become such an integral part of the family, either emotionally or financially, that it cannot be sold.
Sole Traders and Partnerships
For sole traders, the business must close on the death of the owner. However, its assets can be left as a legacy to the chosen beneficiaries, picking up where the deceased owner left off. It’s important to identify the business assets in the will and nominate the specific beneficiary, otherwise the assets will be lumped in with the residue of the estate and sold.
With partnerships the situation is slightly different. The future of the business needs to be decided well before either partner’s death and set out in the partnership agreement. The agreement must specify what will happen to each partner’s share and how, and if, the business will continue. Working in tandem with each partner’s will, the future of the business will be assured when written into the formalised partnership agreement.
Decisions about who will inherit the business can be decidedly more complex for families. One option for owners who wish their businesses to benefit future generations, is the formation of a trust. The legal ownership of the business passes to trustees, nominated by the deceased owner, who have an obligation to manage the business for the benefit of the trusts’ beneficiaries (i.e. the family). Trusts are a convenient way of ensuring a family benefits from the future proceeds of the business, without the necessity for ‘hands on’ management.
Owners with shares in small companies may have particular problems with the transfer of their shareholding. The general principle is that an owner’s shares will form part of their estate on death. However, written into some companies’ articles of association is the right for the existing shareholders to buy the deceased’s shares (pre-emptive rights), robbing beneficiaries of inheritance tax savings and the right to sell the shares when they choose (for the best price). A ‘share transfer agreement’ is the preferred method of transferring inherited company shares, giving the beneficiaries the choice of when to sell their shares, and other shareholders a guaranteed option to buy.
Next week we’ll take a look at taxation.
[Note: the content of this blog applies to England and Wales only, as other jurisdictions have different laws and legal processes. In addition, this blog is not a substitute for personalised guidance from a professional adviser and is for information only.]