What the Law Says: The Death of A Business Owner

What the Law Says: The Death of A Business Owner

Despite the inevitability of death, the possibility of incapacity and goals for continuous and sustainable business operations beyond the owner’s life, very few businesses have a succession plan in place. With statistics showing that 76% of businesses do not have a succession plan[1] or that approximately 70% of inherited business do not survive [2], it is clear that making the necessary provisions for the continued operation of your business beyond your life time is a vital aspect of business management and ownership, often neglected until it is too late. So, what will happen to your business should something happen to you?

Succession What Now?

In simple terms, a succession plan details what will happen if something happens to the business owner, partner or key individual, rendering them incapable of proceeding with business as usual. It provides for planned and unplanned exits, from sudden death or disability to planned resignations or retirements [3].  It sets out a strategy and process for the future continuity of a business[4] ,by  identifying potential future leaders of your business and developing their skills to ensure they have the necessary abilities to take over when you or one of the key individuals of the business, such as a shareholder or employee, should leave, whether by way of  resignation, ill health or death. 

Thus, Succession planning entails planning for the future of your business, by identifying the key individuals, employees and resources that will ensure the continuing success of your business beyond your lifetime.

But what then is a Continuity Plan 

So, while a Business Succession plan sets out the procedures and strategies for changes in company management and leadership, whether planned or not, the continuity plan provides for the continued provision of services where something should happen to the owner of the business. Despite the fact that there is no legal duty or obligation in ordinary business practices to make provision for customers and clients to receive continued service, following the  unexpected death of the business owner, the continuity plan ensures that predefined quality service is still provided to clients where there should be unexpected disruptions in business operations, like the death of the business owner or key individual [5]. 

Consequently, Succession planning is a subcategory of business continuity planning, with the latter forming part of disaster management planning. [6]

What happens to your business if you die? 

Well, this will depend on whether there is a business succession plan and what structure the business embodies. Where there is no succession plan in place, what will happen is predominantly determined by the business structure. [7]

Where you have a sole proprietor, registered or not, the business’s continued existence is solely dependent on the owner unless specific provision is made for the future continuation of the business should something happen to the owner. A sole proprietor is not a juristic person and thus is not deemed separate or independent of the owner. What this means is that the owner and the business are deemed to be one and the same person and consequently the death of the owner means the death of the business. The business will cease operations and eventually be sequestrated with the owners estate, entailing the selling of assets and payment of liabilities and debts, the latter of  which could be passed to heirs of your estate should there be insufficient assets to cover debts and liabilities incurred in operating your business.  

The same principle applies in the case of a partnership, who is deemed to be one with the individual partners. A partnership’s continued existence and operations are dependent on the partnership agreement between the partners on which it is formed. As with any agreement, where one of the contracting parties should pass away, the partnership agreement has to be terminated as the original contracting parties have changed, changing the basis, nature and intention on which the partnership business is based. The death of one of the partners means that the partnership will be terminated and cease operations until a new partnership agreement is concluded. 

A different approach applies in the case of Companies and other juristic persons. Corporate entities are deemed to be a person in their own right, although fictitious, separate and independent of its owners and shareholders. As a company is seen as separate and independent of its business owners, a company’s continued existence is not dependent on the survival of the owners. Owners, as the shareholders of the company, will hold company shares as assets,  which upon their death will form part of their deceased estate and be administered, subject to provisions of the Companies Act, 2008, per the deceased’s will or, where there is no will, according to the Intestate Succession Act. [8] 

Common practice, in the absence of a shareholders agreement providing otherwise,  is for the deceased owner’s shares to be bought by the remaining company shareholders [9] , which is statutorily prescribed in the Companies Act in so far as private companies are concerned. Consequently, remaining shareholders will pool together their resources for purposes of buying over the shares of the deceased in equal shares or it will be bought in full by one of the remaining shareholders [10].

But then why a Succession Plan

Without a succession plan on your death, your business is at risk of not only being suspended in indeterminate state with no direction, leadership or proper control accompanied by disruptions in business operation and activities, which may lead  to significant losses,  but it may additionally fuel the eruption of disputes and conflict between colleagues, family and employees. [11] 

Ultimately a succession plan will prevent confusion and uncertainty, averting conflict and disagreement between heirs and employees. It will ensure the right business successor is qualified and skilled to proceed with the business and ensure a smoother transition, reducing disruptions and impact on business activities, while providing for measures to ensure the sale of the business where the same cannot be avoided for a fair value and the easy sale of assets to cover business debts.

Planning the Succession Plan

So, what is the first step in business succession planning? In order to draw up a proper and comprehensive succession plan, which makes provision for all aspects related to the transfer of the business, including financing options and tax implications, one firstly needs to decide on the succession plan option that is most suitable given you business, family and employee set up. 

Which succession option is selected is determined predominantly by you, as the business owner and who you wish to take over the business, whether a family member, existing employee or partner or a complete external, outside party [12].  

The Family Succession Plan 

As many business owners often build up a company, nurturing and growing it for years, with the intention of passing it to the next generation, transfer of a business to family is a common succession plan option. Although this may ensure the future employment and income of your next of kin, you should ensure that the next generation firstly want to become involved in the family business and have an interest in carrying the business forward. Additionally you should ensure that they have the necessary skills and abilities to carry on the business, making provision for their necessary training and skill building to ensure they have the necessary abilities, experience and qualifications to carry the business forward as you always intended. Where the business is transferred to family you should also consider potential disputes that may arise between family members where multiple family members wish to take control of the business. The succession plan should clearly set out how control of the business may then be shared between various family members and clearly set out how ownership and profit share should be structured [13]. 

Another succession plan option involves transferring the business to a partner or key employee, which means that the financing of the transfer can be provided for in the long run, providing financial assistance over years and avoiding financial strains on an employee who cannot afford to fund the transfer of the business. It additionally allows you to mentor, guide and train the identified individual to ensure they have the same vision and goals for the business as you do [14].  

Where there should be no family members or key employees who wish to take over the business, the best alternative option may be selling the business to an external, third party which will in the very least ensure that you receive the best possible value for your business which will then form part of your estate to be distributed amongst your heirs as provided in your will. However this involves a number of additional legal and administrative aspects, such as getting a professional business evaluation and conducting a compliance check while complying with statutory guidelines and provisions relating to business mergers and acquisitions. Given the complexity this may involve, the assistance of a business lawyer will most likely need to be obtained, which will obviously increase overall costs of the transfer. Apart from the time and financial constraints this type of business succession option may entail, it is additionally not always easy to find interested buyers who have the necessary experience or qualifications to continue with business operations and ensure its continued existence in the long term future [15].  

Where you should find yourself in the position of no family, employee or third party wishing to take transfer of the business or where none should be suitably qualified to do same, you may consider liquidating the company, thereby maximising the business value by selling assets, settling debts and liabilities and distributing any surplus amongst your heirs as dictated in your will. This will however see the death of your business with you [16].

Next steps

Once you have decided on the business succession option that works best for you and the future of your business, the second step in business succession planning is drafting a succession plan that makes provision for various aspects and provides for its effective implementation. 

A succession plan should set out the long and short terms goals of your business, identifying what you hope the business to become and achieve. Furthermore, the plan should identify suitable successors, looking at their strengths and weaknesses and providing for their continued development and up skilling. This should be accompanied by a list of key individuals and employees, whose roles, duties and responsibilities are vital to continued business operations and future success. The succession plan should also provide for financing options to assist in the transferring of the business to key individuals, with consideration of the tax implications, setting out possible exit options with a list of the advantages and disadvantages of each. Lastly, the plan should, apart from including the standard operating procedures, also provide for a professional business evaluation and set out a time line for expected succession events [17]. 

Business Succession Planning Success 

To ensure your business succession plan is suitable and will carry forward your business legacy, your plan should be formalised as soon as possible and communicated with the key individuals needed to ensure its effective implementation and ultimately the future of your business. The business succession plan should also be adaptable, adapting to changes easily and providing alternative plans and options based on changes occurring beyond the control of the business and its workforce. Open communication must be encouraged between yourself, the current business leaders, directors, managers and key individuals identified for taking the business forward. This will ensure development of trust and manage expectations, with regular consultations for purposes of monitoring and ensuring developmental plans are being followed and implemented to ensure the necessary skills, experience and opportunities are being provided for[18].

Conclusion 

Succession plans will vary from one business to another depending on various factors such as the structure of the business, whether the succession involves the transfer of the business to an employee, family member or outside buyer as well as covers the legal and financial aspects that are unique to each business. [19].

The plan will identify potential successors who are deemed qualified or skilled to proceed with the business upon your death, as well as ensure their continued development and upskilling to ensure they are able to continue with business operations after your exit. The succession plan will provide for the valuation of the business, contingency plans, tax implications of the business while providing for communication between the employees, family and colleagues and other interested stakeholders and ensure effective implementation of the succession plan. 

A good succession plan will breathe life into your business when you are not there, ensuring the continuation of your business dream and legacy and prevent it from becoming only a remnant vestige forgotten in a previous lifetime.  

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