SMEs and succession planning: How to ensure your business survives without you

Building a thriving small business from scratch is hard work but ensuring its long-term viability, even well after you leave, need not be.

Whether you plan to retire, pass your business on to the next generation or sell your stake in the business, it’s important to have a succession plan.  A well-structured succession plan should even allow you to continue providing for your family in the event of death or other unforeseen circumstances.

In the case of sole proprietorships, key man cover is one way in which to alleviate the pressures associated with the death or disability of the sole proprietor. Key man cover is an insurance policy taken out by the company on the life of a key employee. Per this policy, the company would be liable for the policy premiums and would be paid the proceeds in the event of the employee’s death or disability. It also provides liquidity to ensure that the business can continue trading until such a time that a new director can be appointed or the business can be sold.

“When the key personnel passes away and there’s outstanding debt, there’s a very strong possibility that it would breed uncertainty among creditors and they might want to pull that credit line almost immediately. But if you’ve got capital available to keep the sharks away while you’re trying to get that business sustainable, it gives you that time to sell it at fair value rather than through a forced sale,” said Mohammed Nassuirio, an executive financial planner at Nedbank Wealth.

In a partnership structure, partners can choose to enter a partnership agreement upfront. Such an agreement would typically list each partners’ contributions, denote their responsibilities and long-term business plans.

Partners can also opt to enter into a buy and sell agreement, in which they agree to a formula by which to divide or sell the stakes in the business to the remaining partners upon the death of one or more of the partners. Typically business partners would purchase life insurance policies, each partner would be liable for the insurance premiums related to the life of another partner and would, in the event of a death, use the proceeds to buy that partners stake in the business at fair value.

In adhering to good corporate governance business owners should meet with their partners at the beginning of each financial year to determine the fair value of the business, said Paul McCool, a senior financial planner at Nedbank Business Banking.  “If there is a huge contract that has been awarded to that business during the year that materially affects the value of that business, a special meeting would need to be held to determine the value of the business”.

In addition to providing the remaining business owners with the funds to purchases the deceased stake in the business and stave off the advances from competitors, the funds can be used to “pay-out” the spouse of the deceased. In such cases the deceased’s spouse would not be at the mercy of the remaining business owners, nor would he/she have to serve as a director in the business.

It would also provide liquidity in the estate of the deceased. “Liquidity is the single most important thing in any business person’s estate. Liquidity in the estate is used, or can be used, to pay for death duties or capital gains tax and it can be used to invest to bring in income, which the deceased can longer bring home,” McCool said.

He also advised companies to take out contingency policy liabilities on the loans granted by partners, such that in the event of a partner’s death the loan the executor of the deceased’s estate would not be forced to attach company assets to reclaim loan. This, as the South African Revenue Services (SARS) takes first priority in terms of pay-outs after death.

Insurance policies, to ensure the continuity of the business, can be structured in various ways to meet the needs of the business and its owners with each having a distinct set of estate duty and tax implications. It is advisable to seek professional help from your Nedbank Business Banker in crafting an appropriate solution.

Whether you are starting a business, running an established business or looking to expand, you need a reliable, affordable banking partner who understands the challenges of your business and responds with flexible solutions to your needs. Nedbank has extensive experience in serving small businesses and offers a comprehensive suite of payment, investment and finance solutions, as well as industry specialisation and services that extend beyond banking. Why not contact one of Nedbank’s small business experts to help you see money differently and take your business to the next level? Call 0860 116 400, email SmallBusinessServices@nedbank.co.za or visit www.nedbank.co.za/business for more information.