Business Succession Planning Singapore
I think you will agree with me that:
Building a business is tough. More importantly, maintaining the legacy of a successful business is equally tough.
In this article, we will let you understand and guide you on planning for business succession either for your corporate, small businesses or family business.
So that you won’t end up like Swatow Restaurant, who did not plan for business succession, and closed down 18 restaurants in Singapore because the owner passed away suddenly due to stroke.
What Is Business Succession Planning?
Business succession planning, also commonly known as business continuation planning, is a very simple concept about planning for the business to continue upon departure of any one of the business owner.
Apple Inc. is a good and successful example. Even though Steve Jobs has passed on, today, Apple continue to run as one of the most valuable company in the world.
Tim Cook, who is the current successor, continue to stir the company to greater success.
Business succession planning includes:
- the process of successful transferring the ownership of the business
- transferring from one business owner(s) to another person(s)
- the process of selling and purchasing of the business shares
- what should be done upon the death of the outgoing business owner(s)
- what should be done upon the leaving of the business owner(s) during their lifetime
Now, compare Apple Inc. with Swatow Restaurant.
Swatow Group was bought over by Mr. Yang in 1988. After he took over, he quickly expand the business and opened various outlets in Singapore and the business is striving.
However, in 1992, when Mr. Yang was in Japan, he suffered a sudden stroke and passed away. Due to his passing, the wife, who is a home-maker and had no experience handling businesses and making business decisions, have to come to Singapore to settle the company affairs. Shortly after, the Changi Airport Group terminate the lease with Swatow Group which was signed under the owner, Mr. Yang.
The company was forced to close down 18 restaurants in Singapore which resulting in a loss of more than 500 jobs.
Why Is Business Succession Planning Important For My Business?
Here are some of the reasons why you should have a business succession plan for your business:
- Business will be transferred smoothly with the least amount of hassle
- Planning for contingencies could include insurance policies that provide the outgoing business owner:
- a potential income stream for the retirement of the outgoing business owner
- an income source for the family of the deceased business owner
- an ongoing income for a disabled business owner
- an ongoing income for critically ill business owner
- a parting gratuity for an outgoing business owner
- a retirement gratuity for a retiring business owner
- Careful planning could protect the business from forced liquidation due to the sudden passing of the business owner or when the business owner is suffering from permanent disability
- To helps to shorten the time taken as a Buy-Sell Agreement could be in place during the succession planning process
During planning process, there could be some scenarios that we look at so that when the event happens, the business succession plan could act steadily and with certainty.
What Will Happen If There Is No Business Succession Plan In Place?
Without a business succession plan in place when unexpected death or permanent disability happens, it can be very detrimental to the business.
Let’s take a look at some consequences:
- Remaining business owners will fight over the shares of the departing business owner
- Remaining business owners will fight over the percentage of the business
- Potential dispute between the sellers of the business (could be the spouse) and the buyers (seller wants higher while the buyer wants lower price)
- If the outgoing business owner is in charge of the revenue and sales of the organisation, the sales figure could drop dramatically and result in decline in profits for the company
- If the outgoing business owner passed away and is the sole breadwinner of the family, there will be no income to the family to sustain their lifestyle and livelihood.
- If the outgoing business owner suffers from critical illness or becomes total and permanently disabled, he/she will not be able to work and therefore, could affect the operations of the company and in turn, affecting the revenue of the company.
What Are The Events That May Trigger A Succession Of Business?
There are different scenarios in a business that might trigger a succession of businesses.
Here the possible trigger event:
- Total and permanent disability
- Critical illness
Some events could be planned but some event comes at a time that is ungodly.
So, do take action now and plan ahead before unexpected or premature event happens.
What Are The Tools Involve In Business Succession Planning?
Here are the tools needed to design and plan for a detailed business succession planning:
Financial statements: The financial statements is an indication of the financial health status of the business. More specifically, the Income Statement and the Statement of Financial Position. With the financial statement, planning could be based on past performance to project future performance. Note that it is not necessary that past performance guarantee future performance.
Business Valuation: There are a few methods to calculating the value of the company but the main purpose is to determine the eventual transaction price when business succession or change in leadership.
Tax Requirements: Business tax advisers could help in maximizing the business and business owners’ tax positions. A comprehensive business succession plan should be integrated into the estate planning of the outgoing business owner(s).
Budgets and Forecasts: When we look at financial statement previously, it determines the historical records. However, for this section, they are looking at projected and future performance of the company.
Utilizing Insurance Products: Most of the leadership succession planning incorporates insurance products or insurance policies to maximize their positions in succession planning.
Here could be the possible scenarios that requires an insurance policy:
- For business owners would wish to use the business succession plan to obtain a steady income stream after retirement, the financial planner could incorporate retirement planning in the succession planning.
- For business owners who are worried about contracting a major illness, especially for people with family histories of particular illnesses, the owner could purchase a critical illness insurance package.
- If a business owner is worried about permanent disability, he could incorporate disability benefits into the policies
- If an owner is worried about estate planning and estate duty, an estate planner could help to ensure with insurance policies to settle the estate duty. Even though in Singapore, there is no estate duty. But if you have estates in other countries, your assets might be subjected to estate duties in your local country.
- If a company is worried about losing the key person of the organisation as the key person is an important figure of the company, the company could purchase a key man insurance policy.
Buy-Sell Agreement: The Buy-Sell Agreement is an important tool in a comprehensive business succession planning process.
During the trigger event (e.g. death or permanent disability), the Buy-Sell Agreement, which is a legal document, binds the parties involve in buying and selling of the business.
What Are The Succession Planning Strategies?
We will discuss which funding strategies or mechanisms are required to have a comprehensive succession plan.
Investments: A business may choose to invest their funds to various financial instruments like bonds, futures, options etc in hope that the investment returns will grow over time and during the triggered events, the business owners can determine the value of the investments to actualize the profits.
The bad side about it is that it is taking a much bigger risk because the value of the investments might potentially be higher but it might also be lesser than expected.
Banks and Financial Institutions: Another strategy to fund for business succession plan is to borrow from the bank or financial institutions via loans or credits.
We feel that this option is not as favourable as it involves the business going into debt. The banks or lenders may ask for collaterals on loans.
Internal Reserves: This will means that the business must save up an internal reserves to fund the business plan. It is usually for cash-rich organisations with huge reserves.
Insurance-Based Funding: This option is the least expensive and most effective solution compare to the rest that is available.
When the business owner or key person dies or is permanently disabled, the ownership/shares of the business is transferred. At the same time, the insurance will be activated to fund the buying and selling of the business.
This is the best and cheapest option available.
What Are The Considerations In Business Succession Planning?
When designing and drafting your business succession plan, the following questions could be a food for thought:
How many owners are there?
As we have established earlier that an insurance policy is the optimum solution to succession planning. The number of business owners will determine the preferred ownership of the insurance policies.
If there are only a handful of business owners, under the Buy-Sell agreement, they may prefer to choose the cross-purchase agreement or self-purchase agreement.
If there are many business owners, the self-purchase agreement or equity ownership agreement could be the preferred choice.
How Old Are The Owners?
The age of the owners could determine how soon the trigger events might happen especially in the case of retirement. It might also help in determining the method of settlement for the retiring owner.
What Is The Percentage Of The Business Does Each Of The Owners Own?
The shareholdings of the business owners will help business owners to know what is the approach to the business succession planning and therefore, determining the structure of the insurance policy ownership.
In most cases and straight forward cases, each of the shareholders will own the same percentage of the valuation of the other shareholders in proportion to their current shareholdings.
XYZ Pte Ltd has 3 shareholders.
They are Shareholder X, Shareholder Y and Shareholder Z with 20%, 30% and 50% respectively.
Upon Shareholder X’s departure, Shareholder Y and Shareholder Z will buy over 7.5% ( 3/8 of 20%) and 12.5% ( 5/8 of 20%) of X’s shareholding respectively.
Are The Business Owners Insurable?
As discussed earlier that using insurance policies to insure the business owners is the best option when designing a succession plan. If the business owners are insurable, meaning, they are able to purchase insurance to fund for the succession plan, then it is the preferred choice.
If it is uninsurable, then a regular income upon the occurrence of the triggered event might be the better option.
Are The Owners Related? Is It A Family-Owned Business?
Some owners of the business may be related in some way and the transfer might be between related owners rather than with other business owners.
You may take a look at the following examples:
Shareholder Y and Shareholder Z are husband and wife.
In the event that Shareholder Y or Z depart from the shareholding, it is common that the deceased’s shareholding will be transferred to the surviving shareholder, with no shares being transferred to Shareholder X.
Family Business Succession Planning In Singapore
Business succession planning is important and essential for all types and sizes of businesses which also includes family-owned businesses.
The family-owned business usually forms the major proportion of the family’s assets and therefore, if it is poorly planned, huge amount of family assets might be at stake.
Some of the benefits of a properly and comprehensive family business succession plan:
- The family business succession plan will allow the older and outgoing family members to receive income source upon retirement
- It ensures a smooth transition of control and power between outgoing and incoming, or remaining family members
- It ensures the family business to continue without interuptions
- It protects against forced liquidation or forced sale of the family business in the event of death or permanent disability of a controlling family members
- It ensures clear and clarify from outgoing to incoming successor
- It promotes harmony in the family
How To Start Developing The Business Succession Plan?
Developing a comprehensive business succession plan will requires understanding about the business, number of business owners, have clear understanding from various shareholders about the succession plan.
Drafting of Buy-Sell Agreement would be part of the process and will require a lawyer to do so.
At Financialogy SG, we have partnered with professionals including business consultant, lawyers, auditors, tax advisers, accountants and financial planners to provide a one-stop solution for your business.
Just fill up your information in our contact form below and we will get back to you in the fastest possible working hours.
About Financialogy SG
We are a group of competent professionals that provide a one-stop business solution to our clients. Some of the business solutions includes comprehensive financial planning and business consultancy for your succession planning.
We have partnered with various professionals including lawyers and tax consultants so that you do not need to explore everywhere for your business succession plan. Our partnered professionals will guide you so that it will be drafted according to your will.
Want To Know More Business Succession Planning in Singapore?
If you would like to know more about business succession planning, you may contact us at (+65) 9380 2839 or you can click on the button below to enquire about the different financial services that we provide.
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