Business (with multiple owners) without an effective business succession plan in place.
Issue: Owner retires from the business.
Likely impact: Remaining partners/owners must buy out the exiting partner. But this can be complicated and escalate into a dispute since there is no agreement in place in relation to sale price or how the existing loan accounts or bank debt/guarantees should be managed/refinanced.
A new partner is also needed for the business. However, the remaining partners are unsure how to source an appropriate candidate with the requisite skills. No one within the business had been groomed to join the partnership.
Outcome: A dispute arose over the value of the business and legal proceedings were instituted.
Owners had to take out a further loan to fund the buy-out and costs of legal proceedings.
Junior and support staff were ‘let go’ due to cost-cutting measures taken to reduce cash flow pressures. Significant goodwill was lost as remaining business owners were unable to offer clients the same service standards and prompt turnaround times due to reduced staffing levels.
Existing clients with ties to the exiting owner found alternative suppliers due to ‘ill feelings’ generated by acrimonious legal proceedings.
Business development activity decreased as the remaining owners struggled with additional operational duties and fewer owners to share the workload. This resulted in a considerable decrease in business earnings, which took more than two years to stabilise.
Business (with multiple owners) with a business succession plan in place without effective agreements binding the owners to the terms of the plan.
Issue: Owner retires from the business.
Likely impact: Remaining owners must buy out the exiting partner. But this can be complicated and escalate into a dispute since there is no agreement in place to bind the owners to the proposed business valuation method.
Outcome: A protracted legal dispute arose between the exiting and remaining owners over whether a binding agreement existed.
The strain of the legal proceedings on the business’ cash flow and resources resulted in the business ultimately failing, with the exiting and remaining owners sharing the burden of the business’ liabilities.
Business (with multiple owners) with an effective business succession plan dealing with voluntary exits only.
Issue: Owner is unable to continue in the business due to critical illness.
Likely impact: As this is an involuntary exit, the voluntary agreement is of no assistance in transitioning out the critically ill owner.
The remaining owners must buy out the exiting owner. But this can be complicated and escalate into a dispute since there are no provisions within the existing plan that deal with involuntary exits and no mechanism in place to fund the buy out.
Outcome: The exiting owner’s spouse wished to get involved in the day-to-day operations and take over his wife’s share of the business. The remaining owners did not feel the spouse was suitably qualified to participate in the business and proposed buying out the exiting owner’s share as soon as possible.
Since there was no buy-sell agreement in place to bind the owners to a pre-determined sale price for an owner’s involuntary exit, a dispute arose in relation to the purchase price, delaying the sale.
Pending the sale of the exiting owner’s share, her spouse continued to draw from the business on his wife’s behalf. Resentment grew among the remaining owners as they were required to work harder in the business but earn the same, or less.
Business development activity decreased as remaining owners struggled with additional operational duties and fewer owners to share the workload. This resulted in a considerable decrease in business earnings, which took more than 12 months to stabilise.
Business (with multiple owners) with effective business succession plan dealing with involuntary exits only.
Issue: Owner decides to leave the business.
Likely impact: As this is a voluntary exit, the involuntary agreement is of no assistance in transitioning out the retiring owner. See Situation 1.
Outcome: A dispute arose over the value of the business and the exiting owner threatened legal action. The remaining owners agreed to pay a price above market value to avoid legal proceedings, which severely hindered their cash flow and delayed their planned capital improvements to the business.
Business development activity decreased substantially as remaining owners struggled with more operational duties and fewer owners to share the workload.
The business bore significant opportunity costs resulting from the substantial delay to planned capital improvements. While the business continued to operate, the remaining owners accepted a decrease in overall earnings.
Business (with multiple owners) with effective Succession 4 Business Group business succession plan dealing with both voluntary and involuntary exits.
Issue: Owner dies and another elects to leave, with two remaining owners left to run the business.
Likely impact: The remaining owners expect minimal disruption to the business with both the voluntary and involuntary agreements activated and providing a guaranteed outcome in both situations.
Outcome: The business continued with minimal disruption.
The deceased owner’s share of the business was automatically transferred to the continuing owners at an agreed sale price. Any debt within the business was addressed under the insurance policy. The personal living needs of the surviving spouse (and her three children) were also met, as outlined in the policy.
‘Key person’ issues were resolved with an input of capital into the business (as outlined under the policy) to help fund a replacement.
The exiting owner’s share of the business was sold to the remaining owners using an agreed valuation method, with all parties willing participants in the sale and transition.
The business maintained optimal business continuity and viability.