Question:
Hi, I’m Ting, a director of TCL Sensors Sdn Bhd (TCL), a sensor manufacturer firm that grosses in RM 1+ million in monthly revenues. Presently, I own 40% interest in TCL, head its Research & Development (R&D) department and make sure that TCL’s production plant is run smoothly.
I run TCL with Chin and Lee, my two other directors who own 30% interest each. Chin is in charge of sales and he liaises with both local and overseas clients. Lee, on the other hand, is into finance and administers the affairs of the company.
My question is: ‘Should I nominate my wife to inherit the 40% stake in TCL in my will?’
Answer:
Well, it depends.
Understandably, in Ting’s case, he has the intention of leaving behind his legacy which he spent years or even decades to build within TCL to his beloved wife so that she may enjoy the fruit of his labour even after he has kicked the bucket. It is a thought which is common among business owners and entrepreneurs alike.
As such, I’ll leave Ting two key considerations:
1. Is Your Wife Interested in Running TCL?
Think about it.
If you’re Ting today, have you asked your wife whether or not she has the same interest and passion to run your company?
And, even if she is driven, does your wife possess the necessary skills, expertise and experiences to take over and run the company?
Also, let’s say, she is motivated, skilled and experienced enough to run the firm.
In Ting’s case, can she gel with Chin and Lee, your existing partners to take TCL’s business to the next level?
From above, Ting is into R&D and runs TCL’s production plant. If Ting passes on, his successor has to possess the passion, the technical know-how, the resilience and the energy necessary to ensure that TCL will be able to continue to develop and manufacture a series of new sensor products in the future. Is Ting’s wife up for the task?
I believe this is something that Ting and his wife should consider beforehand.
If his wife is not up for it, then, we would move onto:
2. How to Sell Your Shares for Cash?
There are two possible scenarios.
First, Ting’s wife could run the business for a period of time and wishes to call it a day. She intends to exit the business and dispose of her shares for cash.
Second, Ting’s wife is not interested in running the firm and likes to inherit cash instead of TCL’s shares.
Here, in any of the two cases, Ting’s wife has inherited TCL’s shares from Ting as a result of his passing. So, if his wife wants to sell off her shares, does she sell it to Chin and / or Lee or other interested third-party buyers?
Okay, let’s keep it simple by excluding third-party buyers and focus the disposal of her shares to Chin and Lee only. Thus, here are some questions:
a. What is the basis of valuation of her TCL’s shares?
b. Could Ting’s wife, Chin and Lee agree on a price for the shares?
c. What if Chin and Lee do not have enough funds to buy over these shares?
Hence, as you can see, Ting’s intention of passing on the TCL’s shares to his wife is not well-thought off and may not be suitable if the above concerns stated are not being addressed in advance. This is especially true if like Ting, your business is one that is highly-technical and requires specialised knowledge to have it run professionally and profitably.
In some instances, it would be a much better idea for Ting’s wife to inherit cash and Ting’s partners namely, Chin and Lee to have Ting’s shares if Ting passes on prematurely. This can be pre-arranged by having a business trust set up for TCL.
How Does a Business Trust Work?
Let me illustrate.
First, Ting, Chin and Lee can start by establishing the basis of valuation for their TCL’s shares and for simplicity stake, let’s say, TCL is worth RM 10 million.
Second, Ting can enter into a buy-sell agreement with Chin and Lee where Chin and Lee will buy over Ting’s 40% interest in TCL for RM 4 million if Ting happens to pass on prematurely.
Third, Ting, Chin and Lee can appoint a corporate trustee and sign the Power of Attorney (POA) to allow the trustee appointed to transfer Ting’s 40% interest of TCL to Chin and Lee upon Ting’s passing.
Fourth, the RM 4 million can be financed mostly through a life insurance policy. The life assured is Ting but the premium shall be paid by profits / director’s fees earned by Chin and Lee. Concurrently, Ting forms a trust and shall assign his life insurance policy to the trust so that the RM 4 million will be paid to the trust in the event of Ting’s passing. Out of which, Ting can choose how his RM 4 million is to be distributed to his wife or his intended beneficiaries.
Fifth, similar arrangements as illustrated in Step 2-4 can be set up for both Chin and Lee. Of course, the amount is based on their shareholdings of 30% each.
Based on this arrangement, Ting’s wife will inherit RM 4 million in cash from his trust without inheriting the headache of managing TLC alongside Chin and Lee. Meanwhile, Chin and Lee would own Ting’s 40% interest in TCL and thus, retain their control and leadership in the company. They will have the freedom to run TCL and grow its business in the future.
Conclusion:
Obviously, the above offers a simple illustration on possible issues which would arise if succession of a business is not well-planned for in advance and business owners and entrepreneurs could leverage on a combination of tools such as life insurance policies, business trust, and the Power of Attorney (POA) to allow the succession of a business to be carried out effectively and smoothly.
So, if you’re a partner of a successful business, please feel free to book yourself a 30-minute consultation session to explore for ideas and solutions to establish a proper business trust by filling up your details below:
