Business Succession Planning
Why is succession planning important?
Business succession deserves serious consideration yet, for many of Australia’s small to medium enterprises, this important phase of business planning remains unaddressed until it can no longer be ignored.
Your business successes came as a result of sacrifices, risk-taking, and much hard work. Congratulations are also in order now you’re thinking about your business succession.
But this is no time for complacency. Passing the baton deserves careful attention.
Whether you are thinking of selling your business or introducing a new executive team, you will want to hear information that is relevant to your circumstances.
You can count on Ballantyne Law Group’s Gold Coast legal team for straightforward advice and comprehensive explanations of the consequences of the various options.
What makes a good business succession plan?
A good business succession plan will address a range of issues, including:
A range of people and advisors can be involved in a proper succession plan, including:
Business Succession Problems
Your business succession plan needs to account for a range of exits, including the departure of one (or more) of its principals, and also the sale of the business.
For some business owners, the succession plan is simply to pass the business on to the family member next in line.
Problems with this can include inadequate consideration of sibling entitlements. For example, when a business is left to a family member, are their siblings receiving their fair entitlements?
It’s also not unusual for business owners to assume that when they’re ready to retire, the business will simply be sold.
This thinking often goes wrong because in many circumstances, there is no saleable asset — the business may have no value without the principal’s involvement.
At other times, no buyer emerges because there are too few potential buyers in the market or the asking price for the business is unattractive to potential buyers.
There are instances that are untimely at any time — a relationship breakdown, illness and incapacity, death.
As with any other aspect of business, succession will be easier and less traumatic with proper planning and preparation.
A buy/sell agreement will often be at the core of a business succession plan, particularly where multiple owners/principals are involved.
This buy/sell agreement is a contract between business owners/principals and it deals with the transfer of the business when a ‘departure event’ occurs.
These departure events are most commonly involuntary events, such as a principal’s death, illness or injury. The buy/sell agreement should also include ‘voluntary’ events, such as divorce or retirement.
When a departure event defined in the buy/sell agreement occurs, the continuing principals will be obliged to purchase the departing principal’s interest.
A mechanism to value the business and therefore a principal’s interest, are often included in buy/sell agreements and continuing principals are often able to fund the asset transfer through insurance.
Federal legislation in Australia has recently clarified some of the more complex issues regarding the ownership of policies under a buy/sell agreement. If this applies to your succession plan, it may serve you well to review this subject.
The structure of the buy/sell agreement also needs careful attention because a transfer can have significant capital gains tax and duty implications.
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