Prelude, extract from story 4:
John Tillman and Greg Macintyre owned TillMac Mining Services, a successful Australian company selling machinery and equipment to the mining industry in the Hunter Valley of NSW. In a few years TillMac had grown from zero to several million dollars turnover with 45 staff. Greg was the salesman and the networker. His relationships kept the business healthy and growing but he relied on John to keep the business working and the back office and workshop functioning smoothly. The shares of the company were owned by John and Greg’s respective family trusts which were managed by the same accountant. The accountant valued the business at more than $1,500,000 on the open market.
Over the Christmas holidays John developed abdominal pain and was taken to hospital. One week later he was diagnosed with late stage pancreatic cancer with a very poor prognosis – he had 3 to 6 months to live.
John simply didn’t go back to work and died 5 months after Christmas.
In the last post we discussed how a thriving business ended badly despite everyone acting with integrity, if not lacking foresight.
A Better Outcome
12 months before John took ill, both he and Greg were referred by their accountant to an Estate and Business Succession Planning Specialist who critically examined how their business would be affected by exit of the shareholders either via choice or medical necessity. The specialist put in place a range of measures including:
- A voluntary exit plan with shareholder agreements and financing arrangements so either Greg or John could retire and sell their share of the business
- An emergency exit plan with shareholder agreements where medical necessity (such as happened to John) would trigger life insurance policies to enable the partners to exit and receive fair compensation for their share of the business
- A staff training and development plan to ensure that business wasn’t dependant on any single person
- Company key man insurance policies to protect company cashflow should medical crisis strike
- Proper documentation of key family and business information so that the families and business had a record of what they needed to know
- A properly documented Crisis Management Plan for each family and the business to guide them through both Personal and Company issues
- A regular review process to ensure information, crisis plans and financial measures are up to date.
All the above would have meant that with John’s illness:
- John’s family would have both the Information That Matters and a Crisis Management Plan to guide them
- John’s family would have a quick and fair financial payout for their share of the business
- Greg and the business could employ someone in John’s role and the business would remain healthy and profitable
- The bank would not become nervous about the company’s financial status
- John’s wife Pam would be better able to cope with the loss of her husband and grieve appropriately and feel she had the support of Greg all through the process
- The relationship between Greg and John’s families would remain intact
Unfortunately there are too many stories like TillMac and far too few that address the issue proactively.
Business succession planning has been a difficult subject for many advisers to bring to the table until the business partners witness first hand the impact of illness on their colleagues and friends or suffer a sudden illness themselves – often too late to build a functional business succession solution.
Experience has taught us that approaching the issue as part of the Estate Planning For Life process will achieve a totally different outcome.
Creating relevant wills and Powers of Attorney then building an Information That Matter register and Crisis Management Plan provide a perfect avenue to raise the business succession issue – we recommend it be done in front of the (non participating) spouses who will often provide the impetus for the business partners to create a succession solution.
Good advice puts people first!