By Lee Khee Chuan
Wisdom doesn?t automatically come with old age. Nothing does ? except wrinkles. It?s true, some wines improve with age. But only if the grapes were good in the first place.
-Abigail Van Buren
Tom and Harry (not their real names) own a successful chain of retail shops, as equal shareholders of a Sendirian Berhad (Sdn. Bhd.) company in a city of 600,000 residents.
They recently rejected an offer to sell their company for RM2,000,000 believing that the business was worth much more. Besides, they wanted to expand their business. Among the many keys to their success is their ability to work long hours with each other and to complement each other?s strengths.
Their estate planner did ask what would happen if either of them were not around or became disabled and could not contribute to the business.
Tom, a widower, was especially threatened by the thought. Harry, who cares for his semi-invalid mother, recognised the threat of disability. They asked what they should do. The adviser recommended a funded business continuation agreement. This is an arrangement that provides for the transfer of the share ownership to a party who will continue to operate the business. They thought about it briefly, but delayed acting on the idea when sales activity exploded in anticipation of the year-end season. Tom died of a heart attack just before the holidays ended.
Tom had a simple will drawn up after his wife?s death. Unfortunately, it did not expressively address his business shareholding. He left all his assets in a testamentary trust for his minor children. His brother serving as an executor and trustee is concerned because of the lack of cash in the trust.
In the last few years, Tom had been buying up land from the handsome income earned from his business as he always told his friends land is the best investment. Beside his shareholdings in the Sdn Bhd, he also owns a detached house, but not much in the way of bank savings, because he always thought that by keeping too much cash in the bank, the money is not working hard enough for him.
To raise cash for Tom?s testamentary trust, the trustee planned to liquidate the Sdn Bhd, believing the sale of the shares to be a quicker and easier approach than trying to sell or continue the business. Harry is distraught because he prefers to continue the profitable business. Clearly the two shareholders, the trustee (holding on trust for Tom?s minor children) and Harry, have conflicting objectives.
What could Tom and Harry have done to prevent this unfortunate entanglement?
SUGGESTED SOLUTIONS
1. Realistically assess the implications of your withdrawal from the business, if you are the primary, or only, share?holder, do you have the quality of management in place to enable you to leave the Sdn Bhd without having to sell your shareholdings?
It is just simplistic thinking to assume that the potential for the unlimited life of the Sdn Bhd will solve all business continuation problems.
Business structure alone will not guarantee suc?cess. You must create the environment that will give the new owners the optimal chance to succeed, espe?cially if your future income depends on it.
2. Hire and train successor-owners long before your planned departure. If your business is not the kind that can be easily sold for cash in the open market (and most can?t), create your own market by setting up the key people in-house to be the purchasers. Don?t assume you can bring in someone talented to take your place a few months before you depart. It takes time to find, recruit, and develop successor-managers who can become successor-owners.
3. Enter into a buy-sell arrangement. A written agreement is critical. By contracting with the ultimate purchaser, you create a guaranteed mar?ket for your business in the event of your death or dis?ability.
You also improve the likelihood of a market for your share when you voluntarily retire. An agreement can avoid the problem of surviving shareholders end?ing up in business with a surviving spouse or the chil?dren?s trustee.
To be conscious that you are ignorant is a great step to knowledge.
- Benjamin Disraeli, British politician (1804 ? 1881)
The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!
Source: http://www.sharesinv.com/articles/2012/09/28/estate-planning-for-sdn-bhd-shareholders/
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