1. Why a Sound Exit Plan Is Just as Important as a Good Business Plan
Many business owners dedicate their lives to building thriving enterprises, but only a fraction devote the same strategic attention to leaving or passing on their business. Whether you’re preparing for retirement, grooming a successor, or contemplating a sale, failing to plan for a smooth transition can put your company, your family, and your wealth at risk.
In fact, studies have shown that up to 70% of family businesses fail or are sold before the second generation takes over, largely due to inadequate succession planning.
This article explains how business owners in Singapore can use a combination of legal and insurance tools to exit or transfer their businesses with clarity, control, and confidence.
2. The Risks of Going Without a Plan
Without a formalised succession or exit strategy, business owners face multiple risks:
(a) Family disputes over who takes control
(b) Key employees leaving due to uncertainty
(c) Loss of enterprise value due to disorderly transitions
(d) Liquidity issues at death or retirement
(e) Forced sales or tax burdens on heirs or buyers
To mitigate these risks, successful business owners use a two-pronged approach: legal structures and insurance-based financial tools.
3. Legal Tools for Business Succession and Exit
(a) Shareholders’ Agreements and Buy-Sell Clauses
(b) These agreements outline what happens to an owner’s shares upon death, disability, or exit. A well-drafted buy-sell clause can:
(i) Mandate share transfers to surviving partners or family members
(ii) Pre-set a valuation method for shares
(iii) Prevent outsiders from becoming shareholders
(iv) Provide clarity in otherwise emotionally charged moments
(b) Wills and Trusts
For family-run businesses, passing on ownership via a will or trust allows the founder to designate beneficiaries and structure control. Trusts can also:
(i) Hold shares on behalf of young or inexperienced heirs
(ii) Prevent premature sale or mismanagement
(iii) Provide for multiple generations with safeguards
(c) Family Holding Companies
Using a Singapore-incorporated holding company to own operating businesses can allow for easier transfer of shares, clearer governance, and estate planning flexibility.
(d) Lasting Power of Attorney (LPA)
This allows a trusted person to manage the business owner’s affairs in the event of incapacity, which is crucial for owner-dependent enterprises.
4. Insurance Solutions: Funding and Liquidity at the Right Time
Legal structures are critical but they often need funding to work effectively. That’s where insurance comes in.
(a) Buy-Sell Insurance
To fund the buyout of a deceased or exiting shareholder, partners can take out life insurance on each other. When one dies or exits, the insurance proceeds fund the purchase of their shares, preventing a cash crunch or forced sale.
(b) Keyman Insurance
This covers the loss of a vital executive or founder. The payout helps cover losses, recruit replacements, or reassure stakeholders.
(c) Universal Life or Whole Life Policies for Legacy Funding
Business owners can use these policies to:
(i) Equalise inheritance among children (e.g. one gets the business, others get the insurance)
(ii) Provide liquidity to pay taxes, debts, or facilitate smooth asset transfer
(iii) Fund corporate restructuring
(d) Disability and Critical Illness Insurance
These protect the business if a key individual becomes incapacitated, ensuring there are resources to continue operations or transition ownership.
5. How the Legal and Insurance Tools Fit Together: A Case Study
Mr. Lim, age 60, owns a successful F&B group and has two children. His daughter is involved in the business and his son is pursuing a different career. He wants to retire in 5 years and ensure:
(a) Possible Legal Plan:
(i) Create a trust to hold the business shares for his daughter, who runs the business
(ii) Write a will to allocate other assets
(iii) Sign a shareholders’ agreement with a key manager to ensure continuity
(b) Possible Insurance Plan:
(i) Buy a universal life policy in trust for his son, matching the value of the business
(ii) Take out keyman insurance on himself and his daughter
Ideal result: The business continues under family control, heirs receive balanced distributions, and there are no delays or disputes at death.
6. Start Planning While You’re in Control
Succession and exit planning is not just about preparing for death or retirement. It’s about increasing business value today, building confidence among employees and investors, and avoiding costly disruption.
At 28 Falcon Law Corporation, we work with business owners and their trusted financial advisers to develop bespoke legal strategies that align with your exit goals. We also help integrate insurance-backed liquidity solutions into your plan through our partnerships with independent advisers.
Waltson Tan Director +65 8079 0028 waltson.tan@28falconlaw.com |
Office address: 101A Upper Cross Street #13-11, People’s Park Centre Singapore 058358 |