Are you potentially risking the continuity of your business?

By Lee Quinn , Independent Financial Planner

Over the course of the past year, I’ve had the pleasure of meeting a variety of #businessowners, of all different sizes and sectors. It’s a fantastic part of my role which allows me to meet so many different people and #understanding what their #ambitions are and why they set up their #companies, from simply wanting to be their own boss to having an idea and wanting to bring it to fruition.

But being a business owner, the focus will mostly be on striving to perfect the #product or #service that you have put together and finding #clients who believe in your business as much as you do – this is not an easy feat. On the flip side, being a business owner also comes with other aspects which you may not have considered as it is outside the general day to day running of the business – finding the best way to #protect your business.

#Businesscontinuity may sound like management speak, but it is a very real #risk to any business that isn’t prepared for the unexpected. I will look to explore this in more detail with some real examples that I have experienced with business owners over the past twelve months.

A Horrible Phone Call

Early in the summer, I was speaking with a client who is a part owner of a fledgling #technology company that has a lot of potential and is in talks with some reasonably large companies in adopting their #software. The client was upset and very shortly into the conversation, he dropped some very bad news – one of his business partners had died unexpectedly; this came as a huge shock as he had always seemed healthy, active and it wasn’t something that could have been predicted.

For the business and the three remaining partners, a serious issue had been created – the #shares weren’t automatically inherited to them. This business hadn’t put together a #shareholderagreement, nor was there any #protection in place to provide funding to purchase the shares from the estate. Further to this, there was also no #insurance in place to cover the cost of replacing his #skillset as a developer. Although we had spoken several times about business protection and continuity, this wasn’t prioritised by the business at the time, especially given that there was no reason from either side to think that such a tragic event so early following inception of the business.

What happens to the business from here?

After confirming that the company hadn’t updated the #ArticlesofAssociation or had a Shareholder Agreement written up, it is very much out of the control of the business in terms of what happens to the holdings of the deceased partner – this will ultimately go to his #estate. Another further complication to such a case is that he did not leave a #will either, meaning that his estate will fall under the #lawsofintestacy, prolonging any process in attempting to get the shares back in company control.

To keep this simple, we will simply assume that the client did have a will and it was a standard mirror will where everything goes to his spouse and then his children, should his spouse pre-decease him. This would mean that the business would have to negotiate with the spouse or children a fair price to purchase the shares of them. Putting aside the difficulty of #businessvaluation, this could be a complicated process. Other alternative outcomes is that the family want to be involved in the business, or they could sell the shares to a third party – these outcomes may not be favourable to the surviving members.

The business also has another problem; they need a developer, and they need one quickly. Without this skillset, the business may not be able to meet its requirements to customers, or even potentially suspend trading until such a person is in place.

Both acquiring the shares and hiring a new developer will likely be costly for any business, which brings into question how economically viable is it for the business to continue?

What should you do to prevent such a situation?

The starting point would be to ensure that the Articles of Association (AoA) are fit for purpose and draft a Shareholder Agreement; two documents that run side by side to help protect the business and the #shareholders. The Articles of Association is a written legal document outlining the rules of how a company is run as agreed by shareholders, #directors and other #interestedparties. The Shareholder agreement is a legal contract that outlines the #rights and #obligations of the shareholders within the organisation, including how shares are passed on in the event of death.

A third legal document also works alongside the AoA and Shareholder Agreement – a will. The personal will of a shareholder should be aligned to that of their AoA and Shareholder Agreement, as any direction from the will that contradicts these documents will be overruled.

In order to ensure that the documents are watertight and fully reflect the wishes and agreement of all shareholders concerned, I would always recommend that you seek advice from a reputable #corporate #lawyer. Although such services will come at a cost, it will certainly be less costly than not having them in place in the event of any unforeseen incidents. A corporate lawyer will be able not only draft up the documents for you, but also important raise points that you may not have considered.

The legal documents are now up to date… do I need anything else?

Having professionally drawn up legal documents provides a solid foundation for protecting your business, but this doesn’t cover the cost of having to purchase shares or replace skillsets. Although the agreements may highlight that remaining shareholders have first refusal on any shares left behind, these shares will still have a #value which will require #monetary #consideration. Depending on the value of the shares, the business or shareholders may not have the finances in place to cover the cost of the purchase. The same applies to hiring an individual of a similar skillset; funds may not be available to cover the cost of such an individual, especially if needed urgently and the business may need to pay above market value.

In both scenarios, this outlines the importance of having adequate protection in place to ensure that the business can survive without #financialdetriment or outside interference. Each business is different, so any solution would be bespoken to any one business, but it is important to continuously review the circumstances of the business and highlight key changes where documents and policies need to be reviewed.

When I look to help a business with continuity planning, it is a requirement that legal advice has already been sought and all legal documents are up to date. The consequence of this would be that the advice may not fully fit the needs of the business, and this creates unnecessary risk.

Our advisers at Alexander Grace have experience of supporting and advising business owners and their businesses through our holistic approach to independent financial advice. We are happy to work alongside your solicitor to get a better understanding of your business to ensure that you get the best possible outcome and experience. If you are in a position where you where business continuity is a concern for you, please get in touch on 01675 443189 or [email protected]

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