The Need for Business Succession Plans

While the concept of having a Business Continuity Plan (BCP) has been around for quite a while, the question of feasibility and sustainability has of late become an urgent and important consideration. Beyond this short-to-mid term BCP in response to the global health threat, it is necessary for business owners to consider a broader strategic scheme of things.

Regardless of company type, the importance of planning for the sustainability of business should not be taken lightly. A business is often the most valuable asset of a person, but many business owners don’t have a comprehensive succession plan for their businesses.

We often look to large organisations and think of strategies to increase the market share but often overlook the longevity aspect of the brand. Large organisations such as Microsoft, Tata Group have always had good succession plans that ensured smooth transition after the baton is passed to the next in line. For the family-run businesses or small and medium-sized enterprises (SMEs), this is even more critical as involving ‘outsiders’ into the family business can present major operational or business risks.

The Harvard Business Review earlier this year illustrated “Family business sequels have similar traits to cinematic sequels. But in the family business, it’s not sets and costumes that are reused; it’s ownership structures, role descriptions, and decision-making processes. On paper, defaulting to a family business sequel makes perfect sense. After all, what worked for the senior generation should work for their children, right? Enacting sequels also often offers the path of least resistance: it doesn’t require the senior generation to change their own responsibilities in anticipation of succession (or after), or to change how their organizations make decisions. But that path can lead to significant challenges.”

Proper business continuation and succession planning involving a Business Value Protection Trust (BVPT) can help prevent a business from being frozen and discontinued in the event of adversities to the key person(s). A sound business succession plan ensures a proper exit strategy without compromising on the value of the business, enabling a smooth transition and strong business interest.

The common top-line objectives for businesses are liquidity, sustainability, and control. Not only does a BVPT protect the interest of the other business co-owners, but it also helps avoid conflict among family members and their surviving business owners.

Without the guidance of a trained estate practitioner, many business owners simply give their company shares of the business and split them up among his children in his will.

In non-family businesses, the spouse of the deceased key person may become a partner of the company despite being unfamiliar with the business landscape. Further complications such as differing views and expecting to be consulted are likely to disrupt the business.

For family-owned businesses, a Private Trust Company (PTC) structure can be optimally employed together with a will and standby trust in place to ultimately hold the family business. A PTC operates like a holding company (of the family assets) cum trusteeship, with the appointed successor managing the company.

There is also a need for planning an exit strategy for disinterested shareholders when the key person is unable to continue being in control. Speak to our estate and succession practitioners to find out more.

In helping business owners to grow and protect their businesses, our estate and succession practitioners will help to evaluate risk factors, protecting assets from creditors, and ensure their heirs benefit from the rightful distribution of assets.

Why is there a need for business succession plans? | PreceptsGroup
This article is first published on our newsletter, The Custodian Issue 14 on March, 2020. Click here to subscribe to our latest newsletter.

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