While many people appreciate the importance of estate planning to protect their wealth and secure the livelihoods of their loved ones when they die, very few business owners are giving it the same thought.

If you are an entrepreneur or business owner is it vital to ask critical questions, for example:

• Will my business continue to operate when I die?
• Will my business go to my spouse and / or child(ren)?
• Are they able to run the business?
• Do they even care to take it over?
• If in a partnership, do I want my other shareholders to buy out my shares in the business?
• Do I want them to pay it into my estate?
• How will they pay for this and how will my shares be valued?

Heartache and headache

Barend van der Westhuizen, a Certified Financial Planner and Provincial General Manager at Absa Insurance and Financial Advisers, says your will should carefully detail how you want your business affairs to be handled, and it should elaborate on the role of each person when you die.

Johan Strydom of FNB Fiduciary Services says a failure to plan properly for the appropriate disposal of your interests in a business will leave headaches for the surviving business partners as well as your spouse or heirs.

And it’s not just these immediate individuals who can be negatively impacted by a failure to plan for business continuity. Strydom says if your company employs people or has suppliers who depend on it, they can also experience significant financial problems if you don’t plan ahead.

Death and taxes

The tax implications in various scenarios, if unplanned for, can become onerous, and Van der Westhuizen says you need a professional to help you navigate this difficult terrain.

“As a business owner, you must verify your business assurance, current value of the business and whether it is aligned to the various applicable laws, such as tax,” he says.  

“In some instances, an adviser will detail the best way for you to plan your estate to legally reduce the exposure to heavy estate duties. Many families find themselves unnecessarily burdened with this when their loved one dies.”

He adds that a certified financial planner is able to guide you on legislative changes, as well as the best way to structure your business should you want its legacy to continue after you die.

This may include updating your trust fund structure, something the SA Revenue Service is very strict on, Van der Westhuizen says.

Succession or sale? Don’t leave it to fate

On the other hand, simply leaving your business or shares to a loved one without a comprehensive plan is a big mistake. Strydom warns that unless your spouse or child has been actively involved in managing the business alongside you, it is likely to cause them untold stress, as well as headaches for surviving business partners.

Let’s say your heir rather wants to sell the business than run it themselves. Strydom says that without a proper plan they may find it very difficult to accurately calculate the value of the business. And since it is often very difficult to determine fair value, you may want to avoid your business being snapped up for next to nothing.

It becomes even more complicated, and a risk to the business’s survival, if you have partners and your spouse or child want to sell their newly inherited stake to them with no clear buy-and-sell agreement.

Strydom suggests you consider entering into a legally binding agreement with your business partner(s) on the future ownership of each of your business interests, and the method of calculating or valuing those interests.

The next step would be to come up with a financing arrangement that would provide sufficient capital to buy out your portion and pay it into your estate. “This could be as simple as a life insurance contract with an annual escalation for each business partner, but depending on the ownership structure, it may require a more complex legal and financial arrangement that can be drawn up with your financial adviser,” Strydom says.

Be sure to account and provide for any liabilities, personal surety or credit arrangements as you don’t want to burden your loved ones with these.

Van der Westhuizen says dedicating your life to achieving your business goals is meaningless if your business dies with you. His advice to avoid heartaches and headaches for those who outlive you is simple: “Consult your financial adviser to help in crafting a will which takes into account the current legislative framework.”