MalaysiaWills

“Premarital Agreement” between Business Owners

This article appeared in Malaysia SME magazine.

Rockwills, Rockwills Malaysia, Will Writing

” Adam was a successful businessman. He had joined his childhood friend, David, to start a factory manufacturing carpets. Adam had a 60% share of the business while David had the remaining 40%. Ever since they started, the business had grown by leaps and bounds. Annual profit was now in the region of RM2 million. Their accountant had indicated that the business should have a value in the range of RM10 to RM15 million.

Then tragedy struck. Adam was diagnosed with third stage cancer of the liver and his health deteriorated. Adam immediately wrote a will to give his assets to his wife and children. He took comfort in the thought that the value of his share of the business alone was enough to take care of his family comfortably and see his kids through their tertiary education. He also felt comfortable that his partner, David would not short change him as they had been childhood friends and had gone through thick and thin together for so many years.

After Adam’s departure, his wife wanted to dispose of his shares because she has no interest to run her late husband’s business but David turned her down because he was already controlling and running the company.

Unfortunately for her, no outside party was willing to buy her shares and she had no choice but to plead to David to reconsider the purchase of the shares. He offered her a price of only RM1 million, rather than the actual value of RM4 to RM6 million. Adam’s wife had no choice but to accept the offer even though clearly, she was short-changed.”

This was a real case story that happened to a friend of mine and will continue to happen to many SME business owners if there were no awareness being created that it is crucial to have proper exit planning put in place.

This doesn’t directly apply to family owned SME businesses & I will be sharing more in-depth about planning of family run SME businesses in future articles. In this issue, I am going to share about exit planning for SME businesses where the shareholders are non-family related.

Having a Will is very important, and it is the basic document that all business owners should have to dispose their personal asset. But when it comes to partnerships or private limited company (Sdn Bhd), Will alone is not a complete solution to secure smooth transition of shares and interest among business owners when unforeseen events happen.

A large number of businesses in Malaysia do not have a plan to handle such events. In most Wills that I have seen, there are 2 common intentions of a business owners, 1^st option is they wish to sell their business interest or 2^nd option is they wish that their shares to be inherited by their heirs. However, there are problems that we commonly see with this type of arrangement when triggering events happen.

Triggering events that normally will cause disruptions to businesses are death, total permanent disable and retirement of a business partner. However, depending on different types of business activities, there are also other triggering events such as critical illness, bankruptcy, divorce, loss of professional license or even a deadlock between co-business owners. All the mentioned events will cause huge lost to the business value.

On the untimely death of a business owner, his/her heirs inherit his/her interest and quite often the heirs are unqualified or inexperience to work with the surviving business partners. And due to their inexperience, it may cause disruption to the business and the heir could be demanding for things without a good understanding of the business.

In some cases, the heirs may not even be interested in the business like Adam’s case; his wife has no interest to continue his business and wanted to sell her shares quickly. But her problem was there is no ready market for private limited companies (Sdn Bhd) and partnership and it is very difficult for her and David to agree on a price (or the value of business) when Adam was no longer around. Another fact is that David, being the remaining business owner knows that Adam’s wife is desperate. People’s perception of things changes when money is involved, especially substantial sum of money.

Even if the remaining business owners would want to buy-out the heir’s, they will have difficulty raising the money because funding was never planned for such buy-outs. Indirectly, it will affect business credibility, employee’s confidence and in most cases, it is not uncommon to see some profitable business has no choice but to go for dissolution & discontinuation due to this major disruption.

In short, if business owners do not have an exit plan, it will lead to problems for his/her family and surviving business partners. To minimize these problems, a proper business exit planning or business value protection planning is important. Some authors describe it as “premarital agreement” between business owners. Where business owners during their lifetime and when everyone is still alive make necessary arrangement to plan for available options on how to dispose his/her business interest in the any unforeseen triggering event.

There are typical checklist questions that you can spend 5 minutes asking yourself to roughly gauge whether there’s a need for an exit planning for your business

1. If your business partners die today,
   1. Can you work with his family to run the business?
   2. Can you work well with your partner’s family members?
   3. Can you afford to buy out his business share at a fair price?
   4. If you as a business owner passes away today,
      1. Can your family run your business?
      2. Can your family members work well with remaining business partners?
      3. If your family where to sell of their shares to the remaining business partner, would you want to ensure they get to sell a fair value?

Assuming that the answers above indicate a need for business owners to create a business exit plan, we will then proceed to state down some important elements to address in our legal documents. They are

1. the value of the business;
2. the agreed trigger events for a sale and purchase to be made;
3. whether a forced buy-sell is to take place or a “wait and see” buy-sell is to adopted
4. the funding for the purchase of the business interest;

A complete Business Exit Plan must include all 4 documents below.

1. Buy-Sell Agreement or Cross Option Agreement
2. Power of Attorney
3. Trust Deed
4. Life insurance or funding

The diagram below indicates the relationship between the various parties and the relevant documents.

A brief explanation about the functions of the various documents?

a)      Buy-Sell Agreement: stating the terms and condition of the sale including the share value of the parties, triggering events of the buy-sell and funding (normally it would be life insurance and cash) to purchase the business interest. When such an agreement is adopted, upon occurrence of any of the trigger events, the outgoing business owner MUST sell his business interest and the remaining business owners MUST buy.

b)      Cross Option Agreement: This is sometimes called Double Option or Put and Call Option. It is a flexible form of buy and sell agreement whereby e.g. in the event of the death of a business, the estate of the deceased has the option to sell and the remaining business owners have the option to buy. When one option is exercised, the other must follow. Cross Option Agreement is used when it may be difficult to decide in advance what steps to be taken by the business owners upon the occurrence of certain specified events. Once the exercise of those options (either “Put” or “Call”) it creates legally binding contract.

c)       Power of Attorney: each of the business owners instructs and empowers the Trustee to sign the transfer documents of the outgoing business owner to the surviving business owners when a trigger event occurs. The usage of a power of attorney will eliminate any delay caused by the death or disability of the outgoing business owner and the Trustee need not rely on the business owner’s Executor of the estate to obtain the Grant of Probate before such transfer can be made.

d)      Trust Deed by each business owner: upon the receipt of the sale proceeds by the Trustee, the Trust Deed provides the necessary distribution instructions. It states the manner of distribution to the beneficiaries which will avoids the need to obtain the Grant of Probate or Letters of Administration.

e)    Life insurance/Other Funding: it is prudent that in any Buy-Sell or Cross Option Agreement it is to be funded. One of the easiest methods to provide such funding is by way of a life insurance policy. Where each business owner buys on his own life worth the value of his business interest and the remaining business owners pays the premium, this is known as a 1^st party policy;. Alternatively, the business owners can pay cash to purchase the business interest when one of them exits. However, it is financially burdensome on the purchasers.

For businesses, there’s time to make money, and there’s time to protect your money. Planning for a “Premarital agreement” or “Exit Planning” among business owners are consider an important step made to look into options to protect your money and loved ones. And it is advisable that this planning & discussion should take place when all business partners are still around.

About the Author:

Evanna Phoon is CEO & Founder of www.MalaysiaWills.com. Her website has FREE downloadable ebooks & over 300+ videos on the topic of Will Writing for Personal & Business. She can be contacted via info@malaysiawills.com.

MalaysiaWills-ROCKWILLS FREE TALK : Estate Administration

Speaker: Ms Lee Shet Mei

Speaker Profile:Ms. Lee Shet Mei

Jimmy Choo: A Night Out with a true Malaysia Artist

• Venue: Mega View, KL Tower (skies where so clear that we can see the entire KL city)
• Date: 8 Feb 2012 (7pm-midnight)
• Settings: 15 tables full house guests celebrating a true Malaysia icon, Dato Jimmy Choo

When my friend, Ching from GBC invited me to have a night out with Jimmy Choo, I immediately grab the opportunity of a lifetime. Successful as he is, and will be for many many generations to come, he is a very humble person. A true artist that carved out the perfect shoe for women.

6:30pm - We are early arrivals of the dinner. Left: Vincent Chew from Pensonic, CK from Mystudy.my & Evanna from MalaysiaWills.com

Arriving early at Dato Jimmy Choo's BAM dinner. Left Evanna Phoon from MalaysiaWills.com, CK from Mystudy.my and Vincent from Pensonic

Famous Quotes of Dato Jimmy Choo during the dinner #1: ”I never claim that I am successful because this gives me a reason to keep on learning and be a good student. ”

He is every Malaysian's idol, Dato Jimmy Choo. Nice & Humble with passion in designing fine masterart piece for women's shoe

Famous Quotes of Dato Jimmy Choo during the dinner #2″Many big brands and company, they might look good outside, but inside, there’s a lot of bad things happen that will cost the company a lot in the long term.”

Exco presenting the award, "World's Outstanding Chinese Designer Award 2011 to Dato Jimmy Choo

Famous Quotes of Dato Jimmy Choo during the dinner #3″To do branding, we must be willing and daring to try. If you don’t try, you won’t know what will happen.”

Dato Lewre's (Left most) passion and heart can be seen everywhere in Branding Association Malaysia. He arranged for the free flow beer and a fantastic night out with Dato Jimmy Choo

Famous Quotes of Dato Jimmy Choo during the dinner #4″My idol is my late father and always will be. He had pass down a skill to me that is very valuable. When I design couture, there was no shoe manufacturing company that’s willing to take my orders because the numbers of shoe I wanted to order where below their minimum requirement. Luckily, my late father had pass on the skill of shoe-making to me, with this skill, instead of depending on other people, I manage to design my own shoe label by myself. This is the most valuable gift my late father has given me.”

Jimmy Choo is the most photographed person tonight. Left Joe Yew from Aboss Club

Famous Quotes of Dato Jimmy Choo during the dinner #5″I have a good PR, for branding, you must find a good PR that will help you and my PR is Dato’ Nancy Yeoh.”

12 midnight, background music playing a chinese song titled "Friends" and 99% of participants were already drunk. Thanks for Sponsor from Calsberg

We partied till very late night … Dato Jimmy Choo, you are really the best of the best … I personally admire you that you treat your work like a true artist, bringing out the best in things that you’ve touched …

The focus besides us ladies, are the spectacular night view from KL tower. The clear skies allows us to see our magnificent KLCC

Well, though the night was full of SME business owners and entrepreneur lining up to take pictures with you. I simply can’t feel or linked you to the word entrepreneur or businessman simply because to me, you observed things with your eyes tentatively and you feel your work (that’s how I saw it from the pictures and drawing shown on the screen) … and you are a creator of beauty … thank you for sharing all the great tips with us last night and all the best …

It's an honour standing next to Dato Jimmy Choo, we are his fans and he took time to snap photos with us. Left Francis Pua of APlus Club

MalaysiaWills highly recommends everyone to attend Malaysia Social Media Week 2012

Internet and Social Media has transformed the world in the way we do business or communicate. Last Year, I was invited as the speaker for the World Blogger Summit 2011 but this year, I took the opportunity to help my friend (which is the event organizer) to promote this event.

From Left; Murray Newlands, Jason, Shahul and Myself enjoying at World Bloggers Summit last year

For this year (2012), below are the brief details:

• Venue: PWTC
• Date: 13 – 14 February 2012

MalaysiaWills MSMW logo

MalaysiaWills MSMW banner

Normal Price is as below but If you register via MalaysiaWills, you’ll be given a special discounted rate.

• Corporate: RM 499 per person
• Bloggers: RM 349 per person
• Students: RM 199 per person

Global Estate Planning Convention 2012

Date: 2nd March 2012 (Friday)
Time: 9:30am – 4:30pm
Venue: Sunway Resort Hotel (Not Sunway Convention Centre)

Topics that we cover in this Global Estate Planning Convention are:

• The evolving profile of High Networth Families and the consequences arising from the change in dynamics
• The establishment of an asset protection structure and its advantages
• The vehicles available in various jurisdictions to establish the mainstay of the asset protection structure and the factors to determine their suitability
• The establishment of a family governance structure and its advantage

Practitioners, Bankers, Lawyers, Company Secretaries, Accounting and Auditing firm  that are looking into value add to their client in  terms of passing their wealth across multi-generations

Speakers:

Rockwills Convention 2012 Speaker #1 - Otto-Hans Nowak

Otto-Hans Nowak, Senior Counsel, Borden Ladner Gervais LLP

Rockwills Convention 2012 Speaker #2- Millie Chan

Millie Chan, Associate Counsel, Borden Ladner Gervais LLP

Price:

Normal: RM 170 per person

Online Registration with MalaysiaWills : RM 110 person

Agenda, Banking details and official receipt will be email to you upon filling up and submitting the online registration 

Online Registration for Rockwills-MalaysiaWills Global Estate Planning Convention 2012:

Offshore Company Formation Seminar Summary Report

We had a successful session on our first and ever seminar on Offshore Company Formation throughout Malaysia. Dates and location are as below

• 13 Jan 2012 (Johor) – 9am to 1pm
• 16 Jan 2012 (KL) – 2pm to 5pm
• 17 Jan 2012 (Penang) - 2pm to 5pm

Participants in each region were no less than 20 people, mostly practitioners, company secretaries and some business owners who are looking for tax planning via an offshore company. We gave multiple examples on how to use an offshore for estate planning purpose and how to use an offshore for tax mitigation purpose.

In the seminar, we also touch the concept of double tax treaties and OECDs white list versus blacklist and what are the procedures and processes to ensure confidentiality of the client who forms the offshore company. Some business owners came together with their company accountants and brainstorm with us on their current situation and how our service can be of help to them.

Next round of seminar will only be held on April. You can leave your name and we’ll inform you when there’s future seminars in April 2012.

Online Registration for MalaysiaWills Offshore Company Formation Seminar:

Islamic Will Writing Career Opportunity

Looking for a Career in Islamic Will Writing ? Register Online Below to book your seats. Venue: Kelana Jaya. Please note that this is Islamic Will Writing Career Talk, if you want to explore Non-Islamic Will Writing, kindly click here

Online Registration for MalaysiaWills Business Opportunity Seminar for Islamic Will Writing:

Rockwills Parking location

Due to overwhelming response in our recent seminars, please find below the parking location that you can safely park your car.

CLICK TO ENLARGE PICTURE

Where to Park if you attend seminars in Rockwills, KL

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Rockwills Will Writing Seminar (FREE)

We understand that you have many doubts or questions regarding Will Writing. In Year 2012, we arranged for a special Free Will Writing Seminar for you. You can ask directly to our staffs or legal advisers.

Venue: Wisma Rockwills, KL

Online Registration for Rockwills MalaysiaWills Will Writing Seminar:

Interview with Evanna: Video Blog in Mandarin

Evanna Phoon is CEO & Founder of www.MalaysiaWills.com, Malaysia’s first online will writing service provider for Rockwills Corporation Sdn Bhd & as-Salihin Trustee Bhd. She has over 300+ videos on the topic of Will Writing for Personal & Business.

Video of her recent interview by Robert Ting, can be found here. In Mandarin …