Succession planning? As a business owner with a never-ending ‘To Do’ list, this is often the last thing on your mind. Also known as continuity planning, it is often regarded as an issue reserved for the big corporates.
The reality is that whether it is planned or unplanned, complex or simple, succession planning – or the lack of it – inevitably has profound implications for smaller businesses.
Without it, for example, the business you spent your whole life building could end up being sold for under its true value. Worse still, it could end up failing and become a black hole of debt consuming your personal assets. This is not always the case in corporate enterprises, where sheer size and operating principles shield principals from the harsh realities facing small business operators.
Clearly, therefore, a sound understanding of the concept of succession planning is of vital importance to any entrepreneur, regardless of how big their business is. Crucially, it involves much more than simply setting up a will or an estate planning structure.
Your business structure
Your business structure is the first of several key elements in any succession planning strategy. For an in-depth account of proper business structures, please refer to the article we published on the Schoeman Attorneys website in May 2012.
Broadly speaking, business owners should select the most appropriate vehicle through which to conduct their business. This could be a trust; a partnership; a co-operative; or a small, medium or large company.
In each case, compliance is regulated by a set of rules and sometimes regulations and legislation. When it comes to company structures − including the close corporation structure and smaller company structure − we recommend that businesses align themselves with the New Companies Act (Act 71 of 2008) before the deadline at the end of February 2013.
While undertaking these alignments, you should simultaneously incorporate them into your succession planning strategies to ensure all elements are compatible with each other. In practical terms, this would mean executing a shareholder’s agreement, Memorandum of Incorporation (MOI) and governance rules wherever applicable. \
For close corporations, where the structure is retained, it would mean entering into an association agreement when there is more than one member; or converting the close corporation into a company, then following the steps outlined in the paragraph above.
In the case of co-operatives and other forms of enterprises, existing documents must be reviewed and aligned with the succession planning strategy. As the business owner, you should do this with the assistance of your attorney, financial advisor and accountant (auditor).
During the restructuring process, it is important to take full account of commercial and practical considerations along with legal compliance obligations.
It is of utmost importance that anyone with any debt whatsoever has a properly drafted will in place. A will dictates personal succession of your assets and how the rights of succession in your business will be handled. The business structure itself and other related documents will regulate your business’s internal affairs.
Ideally, your will should be drafted by a professional attorney. Not only should it deal with your personal assets and their distribution, but your will also needs to specify what happens to your business. In this regard, it is important to elect buy-out options in the company structure using documents such as an MOI, shareholders agreement or association agreement (see above).
Alternatively, appoint an executor who is equipped run your business and prepare it for sale; or an executor who is able to handle a sale immediately. Whatever option you go for, choosing the right executor is essential.
Trust and other estate planning structures
Trust (inter vivos or testamentary) and estate planning structures are vital to saving tax and ensuring business continuity. Trusts are successfully used in company structures to house shareholdings where the appointed trustees would step into the shoes of the deceased and continue running the business. This may or may not be the same individual as the appointed executor/s.
In this way, your business will be managed as you had intended. It should be noted, however, that trusts in this context are ideal for continuity purposes – but they also have tax and reporting implications that you should examine fully before deciding whether or not to proceed with setting up such a structure.
Trusts are also very useful when it comes to preserving assets for people with large property portfolios or for people who want to keep assets within a family. Importantly though, trusts should not be used to evade debt regardless of when you might first consider this option.
On the other hand, testamentary trusts are invaluable tools regardless of whether the founder is an entrepreneur − especially when it comes to making sure will beneficiaries, particularly lesser-abled persons, prodigals, minor children or the elderly, are well looked after in the unfortunate event that their breadwinners – business owners or not – may not be able to support them any longer.
Keep your business in optimum health
It is imperative that all business owners implement succession planning strategies regardless of their business’s size.
To keep your business in optimum health, it is equally important to align your succession strategies by amending internal documents and ensuring legal compliance as well as executing a will and implementing estate planning strategies that suit your specific circumstances.