Archive for the ‘Trust’ Category


Page 1 of 11

BVP : What on Earth is Business Value Protection Programme ?

Wednesday, October 3rd, 2007

This time round I am going to elaborate a bit more about Business Value Protection Programme. I am going to talk about - what are its purposes, how it affects the different stakeholders in the business, what happens if there is no such plan being put in place and what are the benefits of having BVP.

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.

Posted in Business Succession Planning, Estate Planning, Shareholders/Partners Sinking Fund, Trust, Estate planning – Will and Trust | No Comments »

BVP : A story of Mechan Nikel Engineering Consultancy Sdn Bhd

Wednesday, October 3rd, 2007

Mechan and Nikel were good friends. They were both very good engineers and they started an engineering consultancy firm 10 years ago. In the early days, they worked 16 hours a day and 7 days a week and until 1 year ago, thanks to their past tireless efforts, the firm has grown to a RM10million-a-year business.

One day, Mechan had an accident at the site and died on the spot. Initially, there were some disruption to the operations of the firm. Since all cheques require both Mechan and Nikel’s signatures, the firm was unable to pay its suppliers and workers’ wages and salaries. Some suppliers were kind enough to extend the credit terms, but a few stopped delivery of some crucial materials causing delay in some of the ongoing projects. The firm had to pay huge liquidated damages to the main contractors. The widow of Mechan begged Nikel to continue to pay monthly allowances to the family as they really needed the money for their daily expenses. Nikel was able to accommodate for the first few months, but as the effect of the loss of projects and payments for liquidated damages set in, the firm no longer had the cashflow to pay the allowances to Mechan’s family. Nikel was faced with increasing workload as he needed to take care of the job functions which were previously Mechan’s responsibilities. The firms’ staff were also leaving in droves due to lack of confidence in the survival of the business. Mechan’s widow was seen coming into the office every other day to see Nikel to ask for payments. Whenever Nikel was unable to pay her, she had no choice but to persist and share her unhappiness with all her friends and relatives. She suspected Nikel was not honest and had betrayed her. One day she asked Nikel to buy over the shares of the firm she inherited from Mechan. Since she knew that the firm was worth at least a few million ringgit, she demanded RM3million from Nikel. Nikel told her the truth, that the firm’s business was going downhill ever since the demise of her husband, and he can only offer her RM300,000. She refused and went on to seek legal advice.

To cut the long and sad story short, eventually Nikel was forced to set up a new company called Nikel Engineering Consultancy Sdn Bhd, taking along with him all the clients of his former company. Today, Mechan Nikel Engineering Consultancy Sdn Bhd is in the process of winding up. Mechan’s children stopped studying in a private school and his widow was last seen going for job interviews. She was a full time housewife up till a year ago.

Conclusion: as we can see, the chances of the above event happening is very real. The best way to avoid such a mess is to ensure that a proper Business Value Protection Programme is in place.

Posted in Business Succession Planning, Estate Planning, Shareholders/Partners Sinking Fund, Trust, Estate planning – Will and Trust | No Comments »

BVP : Business Value Protection Programme (BVP) by any other name

Wednesday, October 3rd, 2007

I had been very busy for the past one week promoting the Business Value Protection Programme (BVP). To my surprise many people have not heard about such an arrangement and many thought that it is a new insurance product and it is too good to be true.

Business Value Protection Programme, Business Continuity Programme, Business Succession Planning and Business Estate Planning are essentially the same thing but from different parties’ perspective.

From the business enterprise perspective – Business Continuity Programme is meant to ensure minimal interruptions to the operations of the business in the event of a loss of one or more of its key partners/shareholders.

From the business owners’ perspective – Business Succession Planning is meant to ensure there is somebody capable to take on the leadership role to carry on the business.

From the estate and heirs of the deceased business owner – Business Estate Planning is crucial in safeguarding their interests by ensuring they get a fair price for the disposal of the interests in the business held by the deceased business owner.

It is worthwhile to note that business buy-sell agreement is only a component of the Business Value Protection Programme (BVP). A complete BVP includes a business buy-sell agreement, the power of attorney to transfer the shares, the insurance plan and the trust deed.  

In my opinion, Business Value Protection Programme is the best terminology to describe the arrangement, as its main purpose is essentially to protect the value of the business so that the interests of all the stakeholders are taken care of.

Posted in Business Succession Planning, Estate Planning, Shareholders/Partners Sinking Fund, Trust, Estate planning – Will and Trust | 2 Comments »