A well planned succession strategy can avoid arguments, financial stress and forced sale of a business!
Michael and Tony own a trade supplies business. The business has a market value of $800,000, if it were to be sold with goodwill, plant and equipment. Michael and Tony’s respective ownership is 50% each ($400,000).
Michael and Tony, both have a spouse and two children. Michael passes away suddenly and unexpectedly. What happens to the business?
Michael and Tony had no succession plan in place and the business reverts to Michael’s wife. Michael’s wife has no industry knowledge and is busy raising a young family. The business has lost Michael’s expertise as well as the 45 hours per week in labour.
Tony will now need to employ someone to keep the business running and to maintain their customer base. This will reduce their income by 35%.
Tony already has a mortgage and children in private school, so he cannot afford to buy out Michael’s share as he is already stretched with his borrowing arrangements.
All of this could have been avoided with a business succession plan. A business succession plan states what will happen to the business in the event of death or disability. Insurance is taken out on each business partner, so that ownership can stay within the partners and the surviving spouse’s family can be paid out for their share of the business.
An appropriate business succession plan, with business partner insurance in place stops the following occurring.
· Arguments
· Financial stress for all business partners and families
· Forced sale of a business
Contact Prosperity Wealth + Advice to discuss how we can help you with your succession plan.
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