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Will Your Business Survive if You Don't?

Published: 15th February 2017

Author: Chris Kelly, Greg Kelly Law Ltd

Published in: Trust eSpeaking | Issue #48

Planning is key

Most owners want to ensure their business will continue after they have died. Often they want their family to be able to carry on the business. A common form of business in New Zealand is the family farm and this poses particular problems all of its own. Most people know that they need to have an up-to-date Will and Enduring Powers of Attorney (EPA) to cope with any unexpected events. However, there is a lot more planning that you should do as well.

Keeping the business running

You need to make sure there is someone who can step in and keep your business going if anything happens to you. Even if you are just stuck in hospital for a time following an accident, you should have someone who has an EPA and can look after the business for you.Usually the best structure is a company where you can be the main shareholder. It is usually best if there are two directors, or at least an alternate director. If you are unable to take care of business, the other director can do so. If you are incapacitated, the person who holds your EPA can exercise your voting rights as shareholder and appoint a new director in the interim.The same would happen if you were to die. The executor of your estate can take over the shares and appoint a new director if needed. It’s important that your family and employees know who to contact if anything like this happens. They also need to know who holds the EPA and who is named in your Will. As well, you need to have a contingency plan.

Who will own the business?

If you operate your business in your own name, then the business becomes part of your estate when you die. Your executor must step into your shoes and must be able to carry on all of the work you were doing. Your executor needs to be chosen with care!If you run your business through a company, which is usually the best approach, then your executor will take over your shares in the company as the shares (not the business itself) will be part of your estate. Your executor needs to be able to select the right person to run the business. You may have some ideas about who that person might be and the qualities they will need to do this successfully. This will help not only preserve the capital of the business, but also retain its reputation and integrity. This should be mentioned in a letter of wishes or some similar informal document.It’s usually better not to specify too much detail in your Will because things can change and what seems like a good idea now may prove totally impractical later on.Your Will also needs to give your executor enough powers to continue to run your business or to sell it. The executor may need to have power to borrow money to keep the business going. You also need to think about whether the business should be inherited by your partner or family – or should the executor sell the business so your family has the money?

Keeping it in the family

In the UK, business advisors have a saying, ‘Shirtsleeves to shirtsleeves in three generations.’ This reflects a common experience. The first generation creates the business. The second generation was brought up being told all about the business and keeps it going. The third generation has the business handed to them, believe that they are successful entrepreneurs and manage to lose the business.Ensuring that later generations of the family work together in a business is not easy. Sooner or later most of the family will want to go their own way with their own share of the family inheritance. Often the best advice is to leave it to the family to negotiate a buy-out. A member or members of the family who are keen on the business can buy the others out and everyone can move forward. Locking the business away in a trust and expecting it to last for 80 years – or even for the lifetimes of your children – may be unrealistic.

The family farm

One of the most common examples of bitter litigation in New Zealand is the fight over the family farm. Traditionally the parents expected one son to carry on the farm and did not want him to start off with too much debt. So arrangements were made to give the farm to that son.These days it can just as easily be a daughter who wants to take over the farm. More importantly, the other members of the family are likely to be unhappy that they are effectively cut out or receive only a small share of your estate. In the past various structures such as trusts have been used in an attempt to prevent possible claims after death.A common arrangement now is to have a company that owns the farm. The shares in the company can be sold progressively, at a fair value, to the family member who wants to carry on farming. This ensures that there is a flow of funds which can be used to make provision for the other members of the family. In farming families, as in most other families, the best advice is to try to be fair. Playing favourites is likely to lead to some bitterness down the track. You do not want your legacy to your children to be years of family feuding.

Good sense to plan ahead

Making arrangements to deal with business issues if you’re incapacitated, or when you die, can be viewed as too hard and/or somewhat macabre. It is, however, good business sense and your family will thank you for some forward thinking to enable your business to continue to operate successfully.

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