Corporate financial health check: Planning for death
When family business owners often talk about planning for ‘family succession’, there is a role for accountants to ‘steward’ their client and manage the outcome of the ‘law of unintended consequences.
In addition to the financial fallout of the pandemic, it is likely that some readers will have had to address the unexpected death of one of their clients in the last year too.
From cradle to grave planning
When onboarding clients it is important to walk them through the implications of death and disability, not just for their families, but for the health of the business.
Corporate lawyers in their drafting tend to consider the worst that can happen, so that they provide, not just the best outcome for their client, but also the best advice they can too.
Competitive tendering for new clients often revolves around compliance and reporting, but a corporate health check is a good differentiator and lets the client know that you are there for key advice decisions, not just the number crunching.
Indeed, coaching and training your clients on risk matters should perhaps be part of best practice going forward, rather than just a differentiator.
Few people plan to die or lose their capacity, but the ramifications of both in business can be extensive and it is worth considering a few specific scenarios.
Sole director companies
Many small or micro businesses are set up this way from day one. Statistically, it is more likely that a business owner loses capacity, than dies without notice. With the historic changes to the power of attorney legislation it is now much easier to cover 'incapacity risk' through a Lasting Power of Attorney (LPA), in respect of property and financial affairs.
Where the business banking is limited to one signatory that LPA could prove a lifeline to both the business and the business owner’s dependents.
It is worth noting that many people put the effort into getting the LPAs drafted, but stop short of getting them registered. There are two particular issues here. First, courts take time to process paperwork and this delay may have a severe financial impact. Second, the LPA application paperwork may have been incorrectly drafted. This could come to light on the application to have it registered and left to the time of actual incapacity could cause even greater problems than the pure court delay.
Friends in business together
The reader may have a view about whether friends going into business is a good idea or not. But often the corporate structuring may be softer as nobody wants to have the difficult conversation.
In general friends go into business together, because they get along, trust each other and have complimentary skills. It is akin to a marriage and as such the concept of a prenup or postnup is just as relevant.
There are war stories of fifty-fifty business owners falling out, but with no mechanism in a shareholders’ agreement to facilitate a buyout.
Similarly, few friends would plan to go into business with the surviving spouse of their late business partner. It is here that a buyout agreement with supporting life cover can be effective in providing a solution and much needed liquidity for the deceased’s family.
Selling a business
Risk management is about considering a range of possible outcomes. Few of us would be brave enough to own their home without insurance, even if we really don’t expect our house to burn down.
Similarly, when clients embark on the sale of a business it makes sense to consider the impact of the capacity of shareholders, especially if those shareholders are not key to the ongoing trade and the clients have no legal ability to “drag” them across the line. For example, a second generation may well want to consider ensuring that parents’ have LPAs in place, lest a capacity issue causes the deal to collapse.
The need for ongoing advice
Business owners need to know who to go to for advice. There is a virtual Venn diagram when it comes to the entrepreneur, as accountants, lawyers and financial advisors all want to be the “goto” advisor. It is important for the accountancy profession to build initial and ongoing “value propositions” to draw the client their way and “healthchecks” can be part of this scalable solution.
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Richard Bertin is a Chartered Accountant, former chair of various committees and current ICAEW Personal Financial Planning Advisory Group member. He established and built up a successful fee-based wealth planning business, selling a stake in 2016 to Stonehage Fleming, the largest independent family office in EMEA.
He continued to further...