The transfer of ownership can come in many forms. It may be a business transferring between family members, gradual reduction in ownership as key staff buy-in or the sale of the business to an unrelated third party. Consideration must also be given to the unwelcome fact that not all business exits are planned, and succession planning can alleviate undue stress in these circumstances.
Commonly, the business value forms a significant portion of the wealth of the owner and a well-designed business succession plan is essential to maximise the business value, manage tax implications and maintain the business legacy. It is never too early to plan, and beginning with the end in mind can help to reduce the burden of business succession. Nonetheless, considering business succession at any point is a valuable exercise.
Some key considerations for succession planning include:
Succession planning is most effective when professional advisors are involved to guide the process. This can include an accountant, lawyer and depending on the desired outcome, a business broker or financial planner.
Often advisors see a business’ needs change through its lifecycle. Sometimes, those changing needs mean that a business will require a restructure to continue to operate effectively. The business structure also needs to be considered as part of a succession plan. There is a seemingly vast selection of business structures available and whilst there is always a preference for simplicity, there needs to be balance between competing demands such as tax implications, asset protection outcomes and flexibility for business succession.
As mentioned, often the business value forms a significant portion of the wealth of the owner and understanding the value of the business and how to get that into the hands of the right people is a fundamental part of a succession plan. Extracting the value of the business involves transferring the ownership of the business and realising its value, which will have tax implications. Consideration needs to be given to such things as capital gains tax, access to the small business CGT concessions, GST and going concern issues, superannuation and liquidation.
A priority of business succession is choosing who you will transfer the ownership to on your planned or unplanned exit. This could be family, key employees or an unrelated third party. Providing adequate leadership experience and training are among some of the consideration required.
A succession plan should also include critical documents such as a buy/sell agreement and shareholders / unitholders agreements. A buy/sell agreement is a contract that sets out how an owner’s interests in a business will be transferred on exit. A shareholders/unitholder agreement covers the operations of the business including structure, management, and direction of the business. Insurance should also be reviewed in line with these agreements.
Business succession planning is an important conversation to have. When done well it can maximise value and preserve the business legacy. If you are ready to start the conversation, contact Cutcher & Neale to start your business succession plan today.