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Passing your business on to your spouse

Thursday, December 18, 2008   By Mike Reddy


Thinking about death is uncomfortable in itself - coldbloodedly sitting down and working out scenarios to deal with what will happen in the event of it actually happening is even more traumatic. That's part of the reason why succession planning goes to the bottom of the 'to do' list for most business owners.

Even those who have gone to the effort of preparing a succession plan may not have constructed it to be in the true best interests of their spouse or the longer term viability of their business. Because of the tax benefits involved, estate and tax advisors commonly recommend leaving the business to the surviving spouse. While this makes perfect tax avoidance sense, it may not constitute a healthy family business succession planning strategy. For a number of reasons, emotional and practical, a surviving spouse may want nothing whatsoever to do with the business in the absence of their partner. This is one reason why succession planning must begin with a frank family survey; it's necessary to establish correctly two things - who wants to perpetuate the business and who can perpetuate the business.

The spousal partner may simply not want to take on running the business. Then the succession planning must take their reluctance into consideration. On the other hand, while many spouses have worked with their partner from the start-up of the business and involved themselves in its operations so that they have an intimate knowledge of it, many have not.

Without proper knowledge of the organisation they may not be skilled enough, or lack the financial experience, to manage it. It’s not doing the spouse or the business any favours to pass on the challenges of running a business to someone who lacks the competence to do so.

If your business has more than one owner then you need to understand the risks you may face if you die unexpectedly without having a proper buy-sell agreement in place. Looking at the situation quite objectively, if you were to make your spouse the heir of your share in the business, or, by default let that happen, would it be welcome to the other partners? Or to your spouse? A successful partnership is a delicately balanced relationship and bringing on board a deceased partner’s spouse can be difficult. Do they get along personally? Would they see eye-to-eye about the future of the business? In the absence of any special arrangement the remaining partners cannot force the spouse to sell them their share, and the spouse cannot force the remaining partners to buy his/hers. This sort of Mexican standoff can spoil a business and create a situation that is both unpleasant and unprofitable for your spouse.

Spousal interests might be best protected by turning your shares into cash through sale to the remaining partners. Again, lack of preparation here can have unfortunate consequences for your spouse – specifically, would they be able to sell your shares, and at a fair price, to the remaining partners? A buy-sell agreement can be structured to manage this by providing for an automatic buyout by your remaining partners upon your death. This arrangement is funded through the purchase of a life insurance policy (also called buy-sell insurance) to facilitate the buyout by them. A written succession plan would detail how the business will be valued and what your spouse’s share will be. As a result, a business succession plan with buy-sell provisions provides all owners and their spouses with legal certainty should the unforeseen occur and reduces the risk of either side becoming embroiled in legal action over a valuation or payout figure.

It’s important to realise that management (your power) and ownership (your assets) are for the purposes of succession planning, two distinct entities. You don’t need to transfer both to your spouse to protect their future. You may decide, for instance, to transfer management of the business to one of your children whose youth, enthusiasm about the challenge and skill makes them the person best suited to exercise management while maintaining an income stream for the spouse by transferring a share of business ownership to them.

Losing a partner is a dreadful enough experience in itself. Bequeathing your spouse an interest in your business that proves to be more of a burden than a support would be tragic. The development of a business succession plan is crucial to making the business provide just the type of support you intended for them.

Mike Reddy is a Chartered Accountant, business coach and advisor helping businesses in Sydney, Melbourne, Brisbane and Gold Coast to easily increase their profits and cash flow. He is currently President of the North Sydney Chamber of Commerce, a Regional Councillor for Sydney North East and a member of the Institute of Chartered Accountants Sydney leadership team. As well as advising businesses, Mike presents business development seminars and webinars and is regularly contacted by the media to comment on small business matters. You can connect with him on Facebook, Twitter and Google+.