Maintaining Control of your Business
Have you ever considered what might happen to the control and future ownership of your business if one of the partners or shareholders were to die or become seriously disabled?
You may be forced to go into business with someone you’d rather not be in business with – your deceased partner’s widow, their son or daughter, or even their widow’s second husband’s lawyer.
In addition, how important is it that your estate and dependants receive a fair price for your shares or business interest?
That’s where a business succession plan comes in.
1. Why have a business succession plan?
The death or disability of a business owner can seriously disrupt productivity and could force a change in ownership. Your number one priority is to ensure you’re able to maintain control over the future of your business.
An effective business succession plan ensures your best interests are looked after in the event you or another shareholder suddenly dies or is disabled. Some things that need to be considered include:
- Who’ll take over the role of the disabled or deceased shareholder?
- Will the other shareholders want to work alongside the successor?
- Will the business be sold and if so, what would it be worth and how would you ensure you get the best price?
- What’ll happen to the shareholding of the disabled or deceased person?
- How will the business continue to operate in the meantime?
Any changes to the business caused by death or disability will inevitably require extra funds to enable the changes to be implemented. Will you have cash reserves to draw on? Will you need to sell assets to free up cash? And will it be enough?
Insurance may be your best form of financial protection (see our case study).
An AIA Insurance Adviser can recommend an effective insurance solution that’ll work in with your business succession plan. Just call us free on 0800 800 242 or email us and we put you in touch with an AIA Insurance Adviser who can help.
2. What are the chances of a business owner dying?
Statistics reveal that the risk of death or disability of a business owner is high.
Probability of death
This chart shows the probability of at least one partner dying before the age of 65.
| Average age of partners | Four partners in business | Three partners in the business | Two partners in the business |
|---|---|---|---|
| 35 | 51% | 41% | 30% |
| 45 | 48% | 39% | 27% |
| 55 | 38% | 30% | 21% |
| Source: Mortality: NZ Life Tables, Disability: Davies Financial and Actuarial (2004). | |||
Probability of disability
This chart shows the probability of at least one partner becoming disabled for six months or longer, but none dying before the age of 65.
| Average age of partners | Four partners in business | Three partners in the business | Two partners in the business |
|---|---|---|---|
| 35 | 20% | 20% | 16% |
| 45 | 19% | 18% | 15% |
| 55 | 18% | 14% | 11% |
| Source: Mortality: NZ Life Tables, Disability: Davies Financial and Actuarial (2004). | |||
3. Business succession planning in action
When Pete and Richard went into business together more than 20 years ago, they did not imagine that their combined talents would build a $2 million injection moulding business. As a specialised plastics engineer, Pete’s abilities were perfectly complemented by Richard’s ability to market and sell their products.
As the business grew, they recognised the need for shareholder protection, so they put together a business succession plan that included a buy/sell agreement that would be funded by AIA Life Cover if one of the partners died. Two years ago Richard, aged 52 at the time, arrived at work complaining of indigestion; three hours later he was dead.
His wife and children had no wish to join the plastics industry, so as a condition of the buy/sell agreement, Pete bought out Richard’s shares with the funds generated by the Life Cover.
Pete was able to hire a sales and marketing manager to step into Richard’s shoes.
