When business owners think about estate planning, their focus often falls on their personal will. But what happens to the business when you are no longer there to run it?

A personal Last Will and Testament is essential, but it may not provide all the answers needed to ensure business continuity.

The term “business will” is commonly used to describe a set of arrangements, such as a shareholders’ agreement, buy-and-sell agreement or succession plan, that provides a roadmap for what should happen to a business when an owner, partner or shareholder dies, retires or is no longer able to fulfil their role.

Without a clear and regularly reviewed plan, a business that took decades to build can face uncertainty, conflict and financial pressure within a very short period.

As Myles Munroe put it: “True leadership is measured by what happens after you die.”

Does your personal will cover your business?

Your valid and up-to-date Last Will and Testament should clearly set out your wishes regarding the assets you own, including your interest in a business.

Depending on the structure of your business, this could include company shares, a member’s interest in a close corporation, or the assets of a sole proprietorship.

However, having these assets mentioned in your personal will is only part of the solution.

But that’s not the end of the story…

The transfer of an interest in a business following death can also be affected by the business’s legal structure and governing documents.

For example, a company’s Memorandum of Incorporation (MOI) or shareholders’ agreement may contain provisions dealing with the transfer of shares when a shareholder dies. These provisions need to be considered alongside the terms of the shareholder’s personal will.

This is where a broader business succession plan becomes important.

A “business will” is not a separate legal document in the same way as a personal will. Rather, it is a useful term for the agreements and planning arrangements that help determine what happens to the business and the owner’s interest in it.

It should address practical questions such as:

• Who will take over the owner’s role?
• Who can or must buy the owner’s shares or interest?
• How will those shares or interests be valued?
• Where will the funding come from?
• What happens to the business while the estate is being administered?
• How will employees, customers and other stakeholders be affected?

The right insurance arrangements can also play an important role by providing liquidity to fund an agreed buy-out or help cover the financial consequences of losing a key person.

Why does your business need a succession plan?

A properly structured and regularly reviewed business succession plan can help:

Maintain business continuity

Without a clear plan, the sudden loss of an owner or key decision-maker can create uncertainty around management, banking arrangements, signing authority and day-to-day operations.

A succession plan establishes who is responsible for keeping the business running and making important decisions.

Reduce conflict

A business interest can represent significant value to an estate and a family, while the remaining shareholders or partners may need to retain operational control of the business.

A clear agreement can help manage these potentially competing interests and reduce the risk of disputes between beneficiaries and business partners.

Provide liquidity and a fair value

A business succession plan should consider how the deceased owner’s interest will be funded.

Life insurance can, where appropriately structured, provide liquidity to fund a buy-and-sell arrangement and help avoid a situation where assets or shares have to be sold under pressure simply to provide cash to an estate.

Protect your legacy

You have invested time, money and expertise into building your business. Succession planning gives you the opportunity to determine how that business should continue and who you want to take it forward.

Why should you review your plan regularly?

A succession plan should never be treated as a once-off exercise.

Your business may change significantly over the years. Ownership structures evolve, the value of the business changes, key people join or leave, and tax legislation is regularly amended.

These changes can affect whether an existing succession arrangement is still appropriate.

For example, certain qualifying small business owners aged 55 and older may benefit from an increased Capital Gains Tax (CGT) exclusion when disposing of qualifying business assets, subject to specific requirements.

The exclusion is determined on an asset-by-asset basis, and qualifying assets generally need to have been held continuously for at least five years before disposal.

For business owners whose company represents a significant portion of their retirement wealth, understanding how these rules interact with their planned exit can be important.

A regularly reviewed succession plan helps ensure that your intended exit strategy remains aligned with your business structure, financial position and the tax rules that apply at the time.

What does a “business will” look like?

There is no single document that works for every business. Depending on your circumstances, your planning may include several different agreements and strategies.

Shareholders’ agreement

A shareholders’ agreement can regulate the relationship between shareholders and establish conditions around the transfer of shares.

It may include provisions dealing with restrictions on transfers, pre-emptive rights, approvals and circumstances in which shareholders can be required to buy or sell shares.

Any shareholders’ agreement should be considered together with the company’s MOI and must comply with the applicable provisions of the Companies Act.

Buy-and-sell agreement

A buy-and-sell agreement can establish what happens to an owner’s interest in the business following events such as death or retirement.

It can set out who has the right or obligation to purchase the interest and how the purchase price will be determined.

Appropriate funding arrangements, including life insurance, can form an important part of this structure.

Succession plan

A succession plan takes a broader view of business continuity.

It identifies who could step into critical roles and establishes contingency plans for the departure, retirement, incapacity or death of key individuals.

For businesses that depend heavily on particular people, key-person insurance may also form part of the overall risk-management strategy.

Protect your business and your family

Business owners should also consider the potential liquidity needs of their estates.

If most of your wealth is tied up in your business, your family may inherit a valuable asset without having immediate access to cash.

Diversifying personal wealth outside the business can help provide greater financial flexibility. Retirement annuities may form part of a long-term financial plan and generally receive significant protection from creditors, although access to these funds is restricted and they should not be viewed as a source of immediate liquidity.

Life insurance can also be structured, where appropriate, to provide funding for business obligations or succession arrangements.

The important point is that no single document or financial product solves the entire succession puzzle.

Effective business succession planning often requires your financial, tax and legal advisers to work together so that the different pieces of your plan align.

The cost of getting it wrong

A business succession plan should reflect the business you have today, not the business you had five or ten years ago.

It should be reviewed when there are significant changes to your ownership structure, business value, key personnel, personal circumstances or the tax environment.

The cost of professional advice is small compared with the potential cost of leaving your family, shareholders and employees to deal with an unclear or outdated plan.

The time is now

National Wills Month is a good reminder to look beyond your personal will and ask a bigger question:

If you were no longer here tomorrow, would your business know what to do?

Your personal will, shareholder arrangements, buy-and-sell agreement, succession plan, insurance and tax strategy should work together to protect the value you have spent years building.

Our team can help you review your estate planning, personal will, business succession arrangements and exit strategy, so you can put a clear plan in place for the future.

Because protecting your legacy is about more than deciding who inherits your assets. It is about making sure what you built can continue.