What’s the Backup Plan for Your Business Partner, if You Died Tonight?
We all have the same amount of time available, regardless of who we are.
In a previous article, I asked the question, What’s the backup plan if your business partner died tonight? Now I’ll ask that same question on behalf of your business partner or shareholder and your family.
We all need time on our side.
In business, we all need time to make things happen. Time to systemize, time to scale, time to learn how to grow a mature business. But what happens when our time is cut short? What’s the impact of not having enough time and what’s the bigger risk of running out of time?
All good things will come to an end sometime.
In the future, hopefully in the distant future, we’ll all leave our businesses. Whether that’s by choice, by circumstances or by the statistical reality of having our time cut short, all businesses will be sold, passed onto others or close.
Know when your times up.
Many business owners refer to leaving a business as creating a business exit. Planning the future exit from your business should start many years before an exit occurs. A carefully planned exit increases the opportunity to monetise the owner’s time and financial investment in the business. The result is hopefully a successful sale, a smooth transition and an ultimately comfortable retirement or interesting new business venture.
Pro tip: Exiting a business is not really about you the owner. It’s more about how easy you can make it for a new owner to take over and continue to make money.
It’s all about your money.
The problem occurs if your exit is unexpected and you run out of time and money. So, what’s the backup plan, for your business partner, if you died tonight?
“Everyone has a plan until they get punched in the mouth.” – Mike Tyson.
It’s time to get your money back.
Your business is valuable and generates the money that provides your family’s lifestyle. Over the years you’ve probably lent many thousands of dollars to the business, and there will come a time when you or your family will want it back. These funds are usually tracked by your accountant and referred to as your Loan Account or your Director’s Loan Account.
How do you get the money out of your business if you die?
Your business partner probably doesn’t have a large amount of spare cash to suddenly buy out your share of the business. Some advanced planning needs to happen so you can have funds available for such an occasion. This is usually done through a strategy using a disability or life insurance policy.
It all starts ahead of time with an agreement on how to value the business.
When a business owner becomes disabled or dies, the surviving business partner will usually want to buy out the remaining shares of the business from the departing owner or their estate.
Without a pre-agreed valuation process in place:
- The surviving business partner will want to value the business as low as possible (if they have to buy your shares from your estate); but
- Your estate and your spouse will want the business valued at the highest possible rate to maximise the sale price.
The statistical reality for all Australians.
You can choose to ignore the opportunity to plan for your own unexpected exit strategy after all perhaps you’ll never die, get sick or have an accident.
Here are the statistical realities for all Australians from the ABS:
- We all have a 1 in 3 chance of suffering a critical illness.
- We all have a 1 in 4 chance of being sick or injured and off work for over three months.
- We all have a 1 in 10 chance of dying unexpectedly.
- We all have a 1 in 20 chance of becoming disabled.
If you want to know the statistical risks for the top 11 key health issues Australians face, you can learn more about them at our site here.
Three questions your business partner and your family will one day ask.
Where’s the backup plan for your business partner if you suddenly needed to exit your business because you’re sick, disabled or, well, dead?
- Where is it written down?
- Where will the funding come from to get your money back?
- Where do your family members and business partners go to activate the plan?
If that’s a little harsh for a blog article, let’s look at it from this angle.
What would you hope your business partner would do if you had an unplanned exit from your business?
From our experience, the top three answers are:
- Buy out my shares in the business from my family and pay them the fair value for the purchase;
- Continue to run the business profitably until someone else with enough cash could come in and buy out my share of the business from my family; or
- Have my family take over my role in the business and continue to run it with my business partner (and hope they all get on well together).
“Hope is not a business strategy.” – Drew Browne.
Without a backup plan, this is what’s likely to happen.
When business owners suddenly find themselves faced with the sickness, disability or even death of their business partner, life and business becomes very complicated:
- Your business partner doesn’t have sufficient funds to immediately buy out your share of the business from your family.
- You don’t have a pre-agreed method of valuing the business.
- Now your business partner wants to value the business as low as possible, while your family wants to value it as high as possible.
- Business productivity has begun to degrade or even stalled.
- Your bank considers a directors prolonged ill-health or death as a reportable default on your business loans and gives you seven days to repay the loan.
- Your suppliers put an immediate stop on credit terms and now demand payment upfront.
- Your family members, distracted by grief, are unable to make stable business decisions on your behalf in the short term.
- The final straw is all the money you lent the business over the years, if not properly documented, is deemed by the ATO as a gift to the business, not a loan that can be repaid from the business sale, so more tax is now payable.
Your family doesn’t get the value you’d hoped for from the sale of your share of the business, if any. They blame your business partner who blames you for not having the backup plan in place.
People don’t normally make their best decisions under this type of extreme stress.
Four helpful things to include when preparing for the risk of an unplanned business exit:
- Document ahead of time the agreed method of valuing the business. This removes the source of arguments at your family’s most stressful time.
- At a minimum, consider having your fixed business costs insured. The ongoing costs of your overheads can be paid from an insurance policy for 12 months while your business partner sorts things out.
- Each owner, director or partner can hold life insurance to the value of their share of the business so they’re guaranteed to have the immediate funds available that can be used to buy out shares of the business, should an unexpected exit occur.
- Consider having the business’s debts (including the money the business owes you in your Loan Account) insured as well.
The end result.
Having a documented backup strategy in place can make life for your business partner and your family predictable, at the most stressful time in their lives. That way, if your business partner needs to buy out your share of the business from your family, you can all be confident there’s immediate funds available and an agreed method on how the business is to be valued for that purpose.
So why bother?
Give your business every chance of survival even if you find yourself making an unplanned exit due to sickness or even death. Having a backup plan means you and your family can receive fair value for all your hard work and the return of all the money you lent to the business over the years.
You had the vision and the ability to build your business from nothing. Have a backup plan for your business partner to follow and your family to benefit from, just in case you suddenly find time is not on your side.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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