By Danielle Walsh

If you became incapacitated tomorrow, what would happen to your business? Though “planning for the unexpected” is not the most pleasant of topics, it behooves all independent jewellery retailers to consider even the most uncomfortable of scenarios when thinking about the future of their business. Specifically, death, disability, and divorce—the three Ds—are among the most common reasons for business failure. Indeed, many shops simply cannot survive the death, disability, or divorce of an owner.

As store owners, the demands of your time are significant, and priorities can continuously pull you in multiple directions. In my experience as a family business advisor, I often find this busyness is used as an excuse to delay planning for the unexpected. Many clients tell me they don’t even have time to appropriately plan for the expected (like retirement)—how are they supposed to find the time to plan for the unexpected?

My answer remains the same: Planning for these events now will significantly reduce conflict, grief, and complications should something happen, and can save both business and family harmony. Whether you are 25, 45, or 85-years-old, you need to have a clear plan for what will happen to your jewellery business should you die or become incapacitated. While this is not a subject most want to discuss with our business partners and families, taking the time to have the conversation makes all the difference.

Death

No one has a crystal ball to tell us when we will die, but I can guarantee you one thing: it will happen. Ignoring this fact doesn’t make you immortal; it makes you careless.

This sounds harsh, but I have seen far too many times the negative impact an unexpected death can have on a family and their business in the absence of a plan. Imagine attending a funeral for a loved one and, rather than finding a solemn place to mourn, you’re confronted with heated conversations about who will be making decisions on Monday morning and which sibling will inherit ownership. Moments like these can tear an otherwise harmonious family apart, especially if the result is not what all parties were expecting. So, how can this be avoided?

All businesses should have in place an outline of terms and conditions upon the death of each owner. Ideally, this will also be reflected in a shareholders’ agreement (if there is more than one owner), as well as each owner’s estate plan and wills. It is best to have conversations about these matters long before something tragic happens, as this ensures everyone is trying to find a fair solution rather than simply negotiating in their own self-interest.

Some items to be determined include:

• Upon death, can shares be passed to a surviving spouse or children who were not active in the business, or do they have to be repurchased by the business or remaining business owner(s)?
• How will the value of the deceased’s shares be determined? Will this be done by the accountant? Further, will it be based on a formula, or will a professional Chartered Business Valuator (CBV) be hired to determine it?
• If shares are to be purchased (by the company or remaining shareholder), will the estate be paid in a lump sum or over time? If the latter, how much time?
• Is there a policy indicating all owners need to have corporate life insurance sufficient to cover at least the tax liability generated by the sale of the deceased shares?
• Does anyone else have signing authority? Can someone else make the decisions and replace the day-to-day roles and responsibilities of the deceased? (Does anyone know what this entails?)

Having all of these questions answered is only half the battle—it is even more important to ensure these answers are communicated and understood by all affected parties. While some business owners have life insurance and, perhaps, a will, many others have nothing in place. Most give very little thought to the possibility or impact of incapacity.

Disability

While death is certain, the risk of disability, especially in our modern age of rapid medical advancements, is greater than many of us care to admit.

From a business perspective, the impact of a disability or incapacity can be as significant, if not more, than a death. Why is that?

Consider the following:

Duration of the disability

Disabilities can be temporary, long-term, or permanent. It is important for business owners to define what constitutes a temporary disability and what happens during that time. How long will the business wait for the owner to return to work? What mechanisms are in place if the disability becomes long-term or permanent?

If we do not differentiate between short- and long-term disability, it is possible for an existing owner to, essentially, inherit a new business partner for years
(i.e. the disabled owners’ power of attorney), which is typically not a desired result.

Income replacement

If an owner becomes incapacitated, where will their income come from?

Disability insurance can be a lifesaver here. It provides income replacement, ensuring the individual and their family are not left financially stranded. While most of my clients have life insurance, many do not have any type of insurance to deal with incapacity, which ends up placing a burden on the family and the business. Again, consider a 50 per cent owner whose spouse is the power of attorney and is constantly asking for more money from the business to pay the bills. The remaining owner is put in a very difficult spot if nothing has been put in place to properly handle this type of situation.

Decision making and control

Who will assume the incapacitated owner’s responsibilities? Similar to scenarios around death, pre-set arrangements to maintain the smooth running of the business are crucial.

During this time, the incapacitated owner’s power of attorney would technically have decision-making authority. Consider a case where there are only two owners—this could make decision-making almost impossible.

In many cases, the power of attorney for property (and business assets) is the same as the power of attorney for care (meaning, this one individual is likely already overrun with things to take care of). Further, making business decisions does not come naturally to everyone, and placing this additional burden on someone already in charge of care and personal property can be too much.

As such, many of my clients have a separate power of attorney for business assets, and this person is made aware of the terms and conditions outlined in the shareholders’ agreement. Further, if incapacity is properly outlined in this agreement, the power of attorney simply needs to implement the terms and conditions as outlined, which all other parties (family, remaining owners) would be aware of.

Without a clear understanding of what constitutes incapacity, as well as the steps that need to be taken when this happens, the remaining business partner(s), the family, and the power of attorney are left trying to navigate this at the worst possible time. Having these discussions before the situation occurs not only ensures all parties have the same expectation, but also helps increase the effectiveness of the conversation.

Divorce

While no one enters into marriage thinking they will one day part ways, divorce is a reality for many. For business owners, the implications can be even more profound.

Indeed, if not adequately planned for, a divorce can jeopardize the stability and continuity of a business. It is not just the owner’s personal life that gets dissected—often, the business becomes a part of the proceedings.

Key aspects to consider:

• How will your divorce impact the business? In the absence of a domestic agreement (i.e. a prenuptial or marriage contract), a business owner may be obligated to provide 50 per cent of the value of their ownership to their ex-spouse. If we go back to the example of two owners who are 50/50 partners, a divorce could create the requirement to provide the ex-spouse 25 per cent of the value of the business. Given an individual’s largest asset is often their business, providing the spouse with most of the other personal assets is not always enough. Does the business need to then provide the remaining amount? How is this dealt with? What about the business partner who has no say or no involvement in the matter, yet may have to alter the plans for the business?
• How will the business be valued in the event of a divorce? Is this set out in advance? If not, this can become a real sticking point and can easily get stuck in litigation.

While many owners have life insurance, domestic contracts are essentially insurance against divorce. This can save a business and a business relationship.

I have seen a number of divorces not just fracture a personal life, but the business and its dynamic as well. The business partner who is not involved is typically negatively impacted if cash flow is required from the business—perhaps the shop can no longer follow through with expansion plans, projected growth, or new hires. This creates resentment that can be very difficult to get past. Having a marriage contract or prenuptial agreement in place can help avoid this situation all together. The breakdown of an owner’s personal relationships should not jeopardize a business that others have also worked hard to grow.

Planning for success

The three Ds—death, disability, and divorce—are uncomfortable subjects that few business owners want to confront. Failing to plan for them though, can mean risking everything you have worked so hard to build.

This isn’t about pessimism, it’s about realism; protecting the future of your business and the financial security of your family. 

Danielle Walsh is a chartered professional accountant (CPA), chartered accountant (CA), and holds certificates in family business advising and family wealth advising from the Family Firm Institute (FFI). Walsh developed her philosophy and desire to help family businesses from her father, Grant Walsh, who has worked as a family business practitioner for more than 25 years. She and her father published a book titled, A Practical Guide to Family Business Succession Planning: The Advice You Won’t Get from Accountants and Lawyers. Walsh also currently teaches the first family business course offered at the undergraduate level at Carleton University in Ottawa and recently joined MNP as a partner, focusing on succession. She can be reached at danielle.walsh@mnp.ca.