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Thousands of expats move to Asia in search of a better life for their families, and many of these people will be starting businesses for themselves. But what would happen if they were suddenly taken ill, or were no longer able to work – could their businesses survive?
When I talk to business owners, I find a worrying number of them have never given a thought to what might happen if they are no longer able to work at the pace they currently do, or worse still cannot work at all, or die. It seems strange really that you put in so many hours to build a business, yet there is no ‘what if…?’ plan.
However, you can protect the other shareholders in the business as well as your family, and it is vital to consider so that your family is protected if the worst happens, and your business can continue to run without you.
Keyman cover is provided by a number of large insurers under what are generally known as business protection plans, and it is designed to help when a leading partner in the business is incapacitated, or dies.
Let’s take a scenario: John moved to Asia 10 years ago, and has been running his own business successfully for the last seven years with two business partners. He has a wife, and two children under three. Unfortunately, John had an accident and is no longer with us, leaving his business without the key person who was responsible for moving it forwards, and his family without an income. He owned 75 per cent of the business.
If John and his business partners had not planned for this eventuality, then his assets would become part of his estate, and depending on how he has written his will, they would pass to his wife. This could include his 75 per cent share in the business. She has never worked in John’s industry, but now finds herself with a controlling share in a business she does not understand, or have any interest in.
John’s partners – who own the remaining 25 per cent of the shares at 12.5 per cent each – now find themselves in a position where John’s wife – as the new majority shareholder – can outvote any of their decisions and there is nothing they can do about it. The likelihood is that the business will founder, and John’s wife and business partners will all lose their livelihood through a lack of planning.
Yet all of this could be avoided. Using a share protection plan, an insurance company will pay a substantial lump sum to the remaining partners on John’s death, which they can use to pay his wife to buy John’s shareholding – so in essence, you have life insurance with the partners as the beneficiaries, and a share purchase agreement which outlines the partners will buy the deceased partner’s shares when he dies.
By writing up a shareholders’ agreement, the three shareholders can agree between themselves in advance what will happen to John’s shares in the company when he dies. For example, his two business partners can have his shares divided between them in a way that makes the most sense to carry the business forwards effectively.
However, let’s say John does not die, but is simply unable to work again because he had a stroke. He will need to have a new source of income, and the partners in the business may need to again take control of his shares.
In this case, a life policy with critical illness cover – which pays out a lump sum on the diagnosis of a critical illness such as a heart attack, cancer or stroke – could be put in place, and this lump sum could be used by the partners to buy John’s shares. He would then have money to generate an income, or if he is able, he may want to retain some of his shareholding in the business as a means of continuing to get revenue. All of this would have to be agreed in advance, and laid down in the partnership agreement.
Calculating the amount of cover you need is not simple, as you will have to consider the value of the shares, the ‘business goodwill’ that is within the business – for example, will customers still come to the business if they know John is no longer with it?
These are the sort of questions that you will need to get advice on, and although this may cost, it will save you a fortune in the long run by making sure everyone knows where they stand if the worst should happen.
First published in Expatriate Lifestyle
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