WHILE there is no way to tell exactly what the economic damage from the current global COVID-19 pandemic will be, there is however widespread agreement among economists that it will have severe negative impacts on the Malaysia economy for several years even in the post-pandemic era.
Take the movement control order (MCO) 3.0, for example. It started early June 2021 and has not as yet ended.
At this rate, more and more businesses are closing as they suffer significant revenue lost through rounds of MCO while maintaining the operating cost.
COVID-19 may not kill the business, but the key man of the business may be vulnerable.
Therefore, business owners should plan and discuss with their business partners about the exit strategy for the business if any untoward event happens to any one of them.
Let’s use a common scenario to elaborate on the importance of the business exit strategy.
John and Kevin are the business partners as the shareholders of Divoc Sdn Bhd, an engineering company. Unfortunately, John died due to COVID-19 infection.
His shares in the company were given to his wife, Anne and she became the new shareholder of the business after the probate process.
Anne was a housewife who had no knowledge of running an engineering company.
Her main concern was only to continue receiving the income of her late husband to take care of her children.
Anne would then sometimes interfere on Kevin’s actions and decisions made for the company. Her incessant queries would raise tension between both of them and create disruption that stops the business from running smoothly.
If we put ourselves in Kevin’s shoes, we can feel that Kevin is stressed out from operate the business by himself after John passed away while continuing paying John’s salary to Anne, who have not been contributing any value to the company.
He feels that the long hours and efforts put into the company are not appreciated. Therefore, he may intend to quit the business and become a competitor to Divoc instead.
It is a shame to see a good company get run down and the founder leaving to start a new one all over again. However, a proper business exit strategy could this outcome around and benefit both parties.
John and Kevin could have setup a Buy Sell Trust as business exit strategy to safeguard the interest of both parties.
The idea of the business exit strategy is to ensure the deceased business partner’s family is well taken care of by selling the share to the existing business partner.
The problem is often that business partners do not address the issues faced when one exits the business through death or retirement.
The questions are whether the existing partners would buy over the shares of the business from the exiting partner, or if the existing partners have enough funding to conduct the purchase to begin with.
Without an agreed plan that is enforceable, the family of the deceased would be left stranded.
The Buy Sell Trust comprises a few documents and elements, they are the Trust Deed, the Buy Sell Agreement, the Power of Attorney and the Trust Fund.
Let’s apply Buy Sell Trust to the scenario of John and Kelvin.
When John died, the Trustee (Rockwills Trustee Berhad) appointed for the Buy Sell Trust execute the share transfer of John’s share to Kevin.
The Trustee is able to do this under the powers granted through the Power of Attorney executed by John in favour of the Trustee during John’s lifetime.
At the same time, the Trustee makes the payment from the Trust Fund to Anne as a consideration of selling John’s share to Kevin, so that Anne has the money to take care of her children without interfering in the affairs of Divoc Sdn Bhd.
This trust therefore achieved the objective of the business exit strategy of safeguarding the interests of each of the business partners.
The Trust Fund can not only contain cash set aside for the Buy Sell Trust, but also a life insurance policy to be encashed for this purpose. It is commonly included as a funding vehicle because the cash may not be sufficient for buying over the shares.
As a person, we take a vaccine to gain immunity of COVID-19. The same thinking should be applied for businesses too!
A vaccine for business that immunises you as a business owner from loss in value for your business share and financial disaster for your family. – July 22, 2021
Jason Tham is the general manager of Rockwills Advisory Services Sdn Bhd.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.