A will to succeed
What is a business will?
A business will is a formal agreement or special provision put in place to protect both the family of the deceased (or seriously ill) and the remaining shareholders within a business. The will outlines exactly what should happen to the shares of the business in the event of death or serious illness, to ensure business continuity and to protect all parties. When structured in the correct way, it will allow the will’s beneficiaries to receive fair value for the shares while also protecting the personal wealth of the remaining shareholders. It is normally, although not always, underpinned by an option agreement and a life assurance plan.
Case study
David is an equal partner in a business alongside Adam, when David unexpectedly dies. David leaves his shares to his three children, Annie, John and Robin, who are now suddenly business owners. However, none of his children were involved in the business prior to David’s death and each has their own thoughts about what the future might look like:
- Annie studied business at university and, although she has no prior experience in this field, would like to be involved in the decision‑making process in the future. Annie is dedicated to fighting climate change and wants to revolutionise the business.
- John is going through a very expensive divorce and wishes to sell his shares immediately, regardless of the valuation.
- Robin has previously run several businesses, but they have all gone into liquidation. Robin has big plans for the business and would prioritise profit above any ethical considerations.
As David’s children are taking the time to agree what action should be taken, the impact upon Adam is significant. He is left running the business during a period of uncertainty and he has much of his own personal wealth tied up within the business. He is worried that he may have to navigate one of the following situations:
- Working with somebody who lacks the skills to run a business of this type or has no interest in running the business.
- Working with multiple people with conflicting ideas about how the business should be run.
- Working with a third party who has purchased David’s undervalued shares.
None of these situations are ideal and could lead to inertia or mismanagement, which could subsequently affect the value of the business and, therefore, the value of Adam’s personal wealth.
Although David’s death was unexpected, this situation could have been avoided had David and Adam agreed from the outset to make their share of the business subject to a business will. With the appropriate legal documentation and life assurance plans in place, David’s family would be safe in the knowledge that they would receive a fair market value for his shares, while Adam would be able to continue to run the business without outside interference.
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