If you own a business where it is a partnership or where you are a shareholder in a private limited company (commonly known as "Sendirian Berhad" company), the chances are it will form a large part of your estate. In such a case where the ownership and management largely coincide, having a Business Value Protection (BVP) plan now can prevent problems later. Therefore, planning for the orderly disposition of the business interest is an important planning consideration.

The most important reason to create a Business Value Protection (BVP) plan is to protect the value of the business when one of the business owner exits. Consequently, the BVP plan provides for the smooth transition of business interests to the remaining business owners when one of the business owners pass-away or suffers from critical illness or total permanent disability. This ensures that the business is continued by the remaining business owners. The BVP plan would be useful when a business owner don't plan leave the business interest to his heirs, otherwise the business owner should write a Will to transfer his/her business interest to be inherited.

A large number of businesses in Malaysia do not have a BVP plan when the business is already a successful one. It is time for such business owners to take action to protect the business value when he/she exits.

There are many events that trigger the exit of a business owner. Traditionally, it covered only for death, total permanent disability and retirement. However, depending on the different types of business activities, the trigger events could include the following:

	critical illness
	bankruptcy
	divorce
	loss of professional license
	a deadlock between the co-owners

Before one embarks into a BVP plan, it is important to answer the questions below:

a.	Is your business profitable now and in the near future?
b.	Do you have an exit strategy from your business in the event retirement or death or disability or serious illness?
c.	Is your exit strategy written down?
d.	Who will run the business when you are not able to?
e.	Have much is the value of your business?
f.	Realistically, can your spouse and children run the business with the other business owners?
g.	Will there be financial security for your spouse and children if you let the other business owners run the business?
h.	If your family were to sell your business interest, can the other business owners pay cash to buy your interest?
i.	Will your family be able to get a fair price for your interest when they sell your business interest?
j.	Have you thought about how your family is to spend and use the sale proceeds?
k.	Will the other business owners consider having a BVP plan?

There are various documents that need to be executed when one creates a BVP plan. They are:

	a Buy-Sell Agreement or Cross Option Agreement
	Power of Attorney
	Trust Deed
	Life insurance

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

What are 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: 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. The ownership of the policies can be structured either as 1st party policy or 3rd party 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 1st party policy; and where each business owner buys on the life of the other business owner(s) proportionately their business interest value, it is known as 3rd 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.

What are the problems that will be encountered if there is no BVP plan? There are various problems but we will consider some of them:

a) Inheritance by heirs: upon the death of a business owner, the ownership of the business interest (but not the job) will be passed to his heirs. The heirs may not be familiar with the business and may not be interested with the business as well. This is particularly worse when the deceased business owner holds the majority interest.

b) Difficulty in selling the business interest: In the event the heirs inherit the business interest, they will have difficulty selling the business interest. This is because it would be difficult to ascertain its fair market value and sometimes the surviving business owners may not allow full access of the business accounts to the heirs. This could result in the heirs selling the business interest of the outgoing business owner at a lower price than what it is actually worth. In addition, due to the "haggling" process for the sale, the uncertainty of the future of the business will be prolonged causing other issues raised below.

c) Financial difficulty for the family: As the business interest forms a large part of the estate, the family of the deceased business owner may face financial difficulty because a large part of the cash was invested in the business. The family of the deceased may be unable pay the deceased's debts and other financial obligations. In the event the business owner suffers from critical illness or is permanently disabled, there is a need to prepare as much cash as possible to pay for the medical treatment and maintenance of the affected business owner. Having a BVP plan ensures that non-liquid shares/interests are converted into cash.

d) Serious disruption: There may be serious disruption of management of the business as unqualified heirs may wish to become active or they may sell share of the deceased to an outsider or even a competitor. This can lead to the closure of the business, which was what the business owners want to prevent.

e) Lack of direction: Once one of the original business owners exist the business unplanned due to death, disability or critical illness, there may be loss of profits and uncertainty about the future success of the business due to lack of direction. Small medium sized business relies mainly on the business owners themselves to make it successful.

In the next article, I will discuss the general structure of BVP and funding.

Azhar Iskandar Hew
General Manager
Rockwills Trustee Berhad

Rockwills Trustee Berhad provides a wide range of Private Trustee and Estate Planning services, including Business Value Protection Trust. Rockwills Trustee is part of the Rockwills International Group and is an associate company of Rockwills Corporation Sdn Bhd, the No. 1 Professional Will Writing Company in Malaysia. Azhar can be reached at 03-77811993 or at azharhew@rockwills.com