Introduction

Small & Medium Enterprises (SMEs) form the backbone of the our country’s economy. They are a testament to the entrepreneurial spirit of our people and our pro-business government. Business succession for SMEs has always been an issue of concern. Very often, we hear of family-owned businesses having gone from rags to riches only to descend into chaos and  flounder eventually when the chief driver dies.

Purpose

Business Value Protection Plan (BVP) is an arrangement among the partners / shareholders to ensure smooth transfer of business interests from the outgoing business owners to the remaining business owners. The events that may trigger the exit of the business owner can be death, disability, critical illnesses, retirement or even bankruptcy.

The Risks of not having a Business Value Protection Plan

Loss of value from the heirs’ perspective

 - Unable to work in the business because not familiar with the business, or do not have the necessary qualification or license

 - There is no ready market for the shares, therefore they will most often be forced to sell to the surviving business owners / partners who may not have the funds or dispute over the pricing

 - Unable to get a fair value for the shares as it is not easy to find a source of reference for the valuation

 - It usually takes between 6 months to a few years to get the letter of administration or Grant of Probate before the estate can be distributed. During this time, the heirs may face financial difficulty

 - The surviving business owners may set up another new business entity if the price of the shares is too high

Loss of value from the business owners’ perspective

 - May lose control over the management of the company due to shares being sold to outsiders (or competitors). Although they may have pre-emption rights to purchase the shares from the deceased estate, they may not be able to match the price demanded by the heirs.

 - The heirs may insist on working in the company, even though they do not have the necessary experience

 - Even if the surviving partners agree to the price, they may not have the funds to fund the purchase.

Loss of value from the company/business perspective

 - The prolonged dispute between the heirs and the surviving owners may cause the loss of confidence from the suppliers and customers. There may be the risks of credit terms called back and payments delayed

 - Employees may feel insecure, thus reduce in productivity and increase in staff turnover

 - The management may risk losing focus on the business and not being able to react fast to the ever-changing market

 - Business operations may be affected if precautions are not taken against frozen bank accounts in the case of partnerships and inability of passing of board resolutions in the case of companies

 - If the above matters become too serious, the business may collapse

The benefits of having a business value protection plan

 - The heirs will get a fair value for the business interests

 - The surviving owners will be able to retain the business interests among themselves without having to come up with huge amount of cash

 - The business will be able to continue without much interruptions

 - Through the trust deed, the business owner will have control over the proceeds from the sale of the shares, thus ensuring that the sales proceeds are spent wisely

As you can see from the above, good coordination with various parties is an essential part of the planning for a proper BVP ie the business owners, lawyers, trustees, insurance companies, tax agents and accountants. As such the BVP Planner will need to have relevant working knowledge on areas such as company’s & partnership acts, contract & tax laws, trustee act, financial statement and insurance matters. The Planner will also need to be able to grasp the peculiarity of various types of businesses so that he can tailor the plan to suit the operating nature of the company’s business and shareholdings. To top it off, he also need to be a good communicator to ensure all the business owners involved understand and agree to the terms of the arrangement.