Why Entrepreneurs are Winning Battles but Losing the War — Business Succession & Estate Planning

Entrepreneurs spend their lives building their business, but risk forfeiting their business, legacy and family wealth if they don’t do business succession and estate planning.

Photo by Scott Umstattd on Unsplash

Winning in the Battlefields of Business

Browse the business section of bookshops or on Amazon and you will find many books that are essentially modern-day updates on Sun Tzu’s or Machiavelli’s treatises on warfare, strategy and power, but for the business world. It’s easy to see why war lends itself to a nifty analogy to the business world.

The marketplace is a battleground where businesses fight their competitors for customers, market share, channels, and talent, with weapons like disruptive technologies, loss leader pricing, design thinking, market positioning, etc. Even within businesses, founders, investors, directors, and executives are jostling for control and influence, even as the business itself fights for survival and more ground.

Entrepreneurs fight battle after battle every day. Before your typical entrepreneur is done with a product development team meeting, he or she hurries into a conference call with a joint venture partner, not before an assistant reminds him that the CMO needs approval on the new digital marketing budget and that the CFO urgently needs to discuss financing options. The next day, it’s another day, another battle.

The Myth of Immortality

Having spent a large part of my career as a commercial lawyer, advising business owners on raising funds, selling and buying businesses, franchising, and designing share option schemes, etc., I have spent enough time with enough of them to know that many of them have an immortality complex.

Unlike the rest of us, they go through life as though they will be around and in charge of the business forever. Questions like “who will take over at the company if something happens to me”, or “will my wife and kids continue to receive checks from the firm if something happens to me,” don’t seem to occur to them until later in life.

They operate in a perpetual mood of ambition and optimism, which is what drove them to give up stable jobs and fat paychecks to take the considerable risk of starting a business. Their time is spent creating possibilities, grabbing opportunities, growing the business and in struggling to find time for their families.

As an inheritance lawyer, I help my clients deal with a loved one’s assets after he or she dies or loses mental capacity (for e.g., from a stroke, accident, or dementia), by distributing those assets to the family, setting up trusts for heirs, or appointing deputies to make decisions on money and health. Many of these loved ones are entrepreneurs. News flash to entrepreneurs: you are not immortal and are just as immune to life’s vagaries as the rest of us.

Rome wasn’t built in a day, but it burnt down in a night

Average, salaried people own assets like a home, cash in the bank, insurance policies, and publicly listed stocks. Dying without an estate plan brings inconvenience and downsides to their family, even more so if they are sole breadwinners and have young kids, but it would not usually be disastrous. The assets, barring an economic downturn, are often readily converted into cash for the family.

However, a business owner’s sudden death or disability can often be catastrophic for the business and his family, for the reasons mentioned below.

Firstly, unless a business is a listed company, it is usually hard to value or sell in a hurry, i.e., most businesses are illiquid assets. Secondly, if a business owner is core to the operation of the business, due to his unique skills and personal relationships or how it is run, his departure may make the business lose its customers, revenue and value overnight, especially if he was the sole director-shareholder. Businesses are like Rome; they cannot be built in a day but can surely burn down in one night.

Thirdly, many business owners are the main breadwinners of their family; i.e., their spouse and children are entirely dependent on them for sustenance and quality of life. Lastly, many business owners’ main source of wealth and income is their business, i.e., their portfolio of assets is highly undiversified.

The upshot of these unique qualities of entrepreneurs is their death or disability, especially a sudden one, can result in the rapid destruction of the business, and consequently, his and his family’s wealth, income, and quality of life, let alone their legacy and life’s work.

It is not hard for us to imagine such scenarios because we have seen them time and again, in advising many children and spouses of departed or disabled business owners. Apart from dealing with grief, they must grapple with the financial ruin and the confusion of having to right a sinking ship. It’s worse when the business owner is mentally incapacitated, as the family knows that there is money in the business, but they cannot access it to pay for bills and treatment.

Watch Your Blind Side

What about a deceased or disabled business owner with family members to take over the business? Or if there are other shareholder-directors who can steady the ship and continue running the business, i.e. the continuity and value of the business is assured? Why would an estate plan still be important?

Even in these situations, the entrepreneur’s family may suffer from the lack of an estate plan. Imagine that a business owner has a home-maker spouse and a son and a daughter. The daughter is interested and involved in the business, and the son is an artist who is not. On the entrepreneur’s death or disability without an estate plan, both children inherit equal shares in the business (let’s assume his spouse passes her share to the children equally).

The son would not contribute to the business but stands to benefit as much as his sister. Is it realistic to expect the son to give up his inheritance, or for his sister to have the funds to buy him out? Let’s not even speak of the conflict and resentment in this scenario.

And what if there are partners to take over the running of the business? In an ideal world, they would do the right thing and pay the family a fair price. This assumes that they are fair people (and have enough funds to make the purchase) and that the business owner’s family isn’t keen to take a role in the business. What if they are keen to enter the business but lack the experience, personality, or business acumen? Imagine the disharmony among management and the effect of the bickering on the business.

We have faced many cases where a deceased or disabled entrepreneur’s unscrupulous partners simply stopped issuing dividends, refused to pay the family the director’s fee or salary they previously paid him (on account of his inability to perform his duties), and paid themselves hefty director’s fees and salaries!

The business owner’s spouse and young children found themselves running out of funds, and the partners knew that the business owner’s share of the business was too little for the spouse to come in and asset control and thwart their actions, and he or she was unlikely to have the stomach to engage professional valuers or lawyers to demand a fairer price for those shares or to sue them for their actions.

Winning the Battles but Losing the War

Business owners probably defer estate planning because they are incredibly busy people juggling a billion things at once, and don’t have the time to spot the danger to their personal and family financial security, and maybe due to the perception that it is a tedious affair that doesn’t add to the bottom line.

Another reason is the fear of losing control of the business. This is because they often mix up estate planning with succession planning. Estate planning maximises one’s personal and family financial security, while succession planning maximises continuity of the business and protection of its value.

They are closely related but distinct. Succession planning is more complex (especially for family businesses) because one must also consider inter-personal relationships and dynamics, and often involves transfer of control (which is hard for business owners). Estate planning should be the first step for a business owner to embark on, as it is much easier than and a springboard to succession planning.

It is disheartening that in a battlefield strewn with so many business failures, there are business owners who win battle after battle and rise — against all odds — to the top of the heap, only to lose the war for their family’s well-being and future.

While many business owners start their business from sheer ambition and drive, what often sustains them and gives their life’s work meaning is their family and the desire to give them a better life and future than the one they grew up with. Others are motivated by the drive to leave behind a lasting legacy in the world or to make it better than before the business started.

Back to the battlefield

We hope that this article helps business owners realise that they fight their battles to win the war, and why estate planning is particularly crucial for them. We are not about to identify a problem and leave it to fester. In the next part of this article, we get into the ‘how’ and explain how business owners can start designing an estate plan and how they can implement that plan with the range of tools available.

This array of tools includes wills, lasting powers of attorney, testamentary trusts and living trusts, CPF and life insurance policy nominations, and agreements such as buy-sell agreements, a customised company constitution or partnership agreement, though the design of an estate plan is far more important than its implementation, because a poorly-designed plan is often just as good as having no plan.

In a series of articles, I explain how the tools work together and how they should be assembled. You may read about the business lasting power of attorney here.

https://medium.com/@bernardchung/risky-business-what-is-a-business-lasting-power-of-attorney-and-why-business-owners-need-it-7c675e6fbf1f

I will also discuss how to identify suitable professionals, as entrepreneurs need specific expertise, particularly from lawyers who are not just familiar with estate planning and family law and practice (i.e. someone well-versed in family law matters like wills, trusts, lasting powers of attorney, and nuptial agreements), but also with corporate matters like business structures, company constitutions, shareholder rights, and shareholder agreements.

For now, from one entrepreneur to another, I wish you good fortune in the battles to come, but remember that the battles you win mean nothing if you end up losing the war for your business, legacy and family’s well-being.