As a business owner, have you thought about what happens to your business and staff if you pass away? A financial planner explains why it’s something you shouldn’t put off.
Thinking about what happens in the event of your passing may feel like a morbid thought, but if you own a business, it’s an important consideration that should not be neglected.
“When you pass away, your assets go to wherever your will says they must go to. And if you don’t have a valid will, there are certain laws that dictate how your estate gets wound up and distributed,” says Bryan Nicol, a Certified Financial Planner at Freedom Financial Planning and financial wellbeing consultant to digital wellbeing platform, soSerene. “So, if you’re a business owner, everyone will need to know who gets your share of the business if there are multiple shareholders, and if you’re a 100% owner, who is now the owner?”
What happens to the business if you don’t have a will?
Of course, it’s not unprecedented for a business owner to pass away without having a will in place. According to the Financial Sector Conduct Authority (FSCA) about 70% of South Africans don’t have a valid will. Considering the size of South Africa’s SME sector (small and medium enterprises are estimated to contribute 40% to South Africa’s gross domestic profit), it’s safe to assume a portion of those without wills are business owners. So, surely there are mechanisms in place to handle that situation?
“For there to be doubt about who inherits your business will be extremely problematic because the last thing you want, as a business owner, is for the business to go to someone who it should not,” says Nicol. “Your business will then effectively be run by someone the employees, colleagues and partners might not know. If you have a business that employs people, the business might come to a halt.”
Nicol explains that when someone passes away without a will in place (what’s called “dying intestate”) the Intestate Succession Act kicks in. “This is a law that governs this whole scenario,” says Nicol.
The Intestate Succession Act has clear guidelines that the High Court must legally follow in distributing the assets of someone who passed away without a will. And it may not be in the best interest of the business.
“Say a shareholder of the business passes away and they leave behind a spouse and a child who have no knowledge of the business, if there’s no will or other agreement in place, the family will inherit that person’s shareholding. That’s the law. The other shareholders will then have to try to buy the shares from them and they’ll need cash available for that – potentially millions. That could be disastrous, especially if the person who passed away was the controlling shareholder. The family could start making decisions for the business and everyone would have to go along with them, or legally try to prevent those things from happening. It could become extremely messy.”
Nicol adds that this scenario could put a major burden on the surviving family, too. They may inherit a business they’re unable to run but be struggling financially. If they can’t sell their share of the business, they could suffer.
How To Get Your Business Affairs In Order
“As a shareholder of a business, there are a few things you should have in place to ensure smooth succession in the event of your passing,” says Nicol.
Buy and sell contract: “This is the first port of call for a business owner and if there isn’t a valid buy and sell contract in place, then they go to the will,” says Nicol. A buy and sell contract supersedes a will, Nicol adds. So, even if a business owner leaves everything to their family in their will, when it comes to the business, the buy and sell contract is the document that will be upheld. In this scenario, the surviving shareholders will buy the deceased shareholder’s share of the business from the estate before the estate is wound up. The beneficiaries will receive the money they paid for the deceased’s shareholding as part of their inheritance.
Life insurance: This is necessary if shareholders don’t have enough money in their personal capacity to buy the shareholding should one of them pass away. “So, say a business has three shareholders and they each own a third. They would take out a life insurance policy on each other’s lives for the value of the shareholding,” says Nicol. “If one of them passes away, the other two would have the money to purchase the deceased shareholder’s share of the business in cash.”
Will: Even with these other documents in place, it’s still important to have a will. “I regard a will as the most important document you’ll ever draft,” says Nicol, who includes it as a mandatory part of the financial planning process for all his clients. “A valid will identifies the executor of the estate and informs the executor how your estate must be distributed (as far as it’s legal and possible). You can also outline if a trust is to be made for minor children’s inheritances should both parents pass away, as well as who the children’s legal guardians should be. It’s a powerful document.”
Business Owner’s Checklist For Succession Planning
Business succession planning can become very complex and it’s best to speak to your financial planner about structuring things correctly. However, Nicol shares a list of basic questions to ask yourself:
1/ Who gets my shares if I pass away?
2/ Do I want them to get money for those shares or do I want to leave the shares to them?
3/ Are there any debts or loan accounts that will need to be settled?
4/ Will insurance be necessary to buy the shares or settle the debt?
5/ Who do I want to run the business if I pass away?
In the 2024 Sanlam Benchmark Report more than 80% of respondents reported currently experiencing financial stress that had an impact on their mental health. By not shying away from your financial worries and tackling them head on, you can take control of your life and gain peace of mind.
