Business Succession Planning
What is business succession planning?
Business succession planning is one of the most overlooked aspects within small to medium enterprises. Just as proper estate planning ensures the effective transfer of personal assets on death, a proper business succession plan enables the smooth transition of a business on the departure of one (or more) of its principals. A proper business succession plan will address a range of departures, including sale, death, illness, incapacity and relationship breakdown.
Many principals of small to medium enterprises simply assume that the business will be sold when they are ready to retire. In some types of family business the succession plan is simply to pass the business on to the next generation.
In our experience, this type of thinking is woefully inadequate for a range of reasons, including in circumstances where:
- there is no saleable asset (the business has no value without the principal’s involvement);
- there is no willing buyer (the pool of potential buyers may be small and without the means to pay what the principal believes the business is worth);
- there has been inadequate consideration of sibling entitlements (if a business is left to one of the children, how do the other children receive their fair entitlement to an estate); and/or
- there has been inadequate or inappropriate structuring, resulting in poor capital gains tax / duty outcomes; or
- there has been an unexpected death, illness or incapacity of a principal.
What should a proper business succession plan cover?
Business succession planning should address a range of issues – structuring, taxation, management systems and processes, insurance, departure events, key personnel and risk management. A proper succession plan may involve the input of a range of people and advisors, including the principals of the business, their legal, accounting and financial planning advisors and insurance brokers. Often the core of a business succession plan will be a buy/sell agreement, particularly in the case of businesses involving multiple owners/principals.
What is a buy/sell agreement?
A buy/sell agreement is a contract between business owners/principals which deal with the transfer of business if a ‘departure event’ occurs. Most commonly, the departure events include involuntary events such as the illness or injury of a principal, but may also be drafted to include ‘voluntary’ events such as divorce or retirement. Put simply, buy/sell agreements oblige the continuing principals to purchase the departing principal’s interest if a departure event occurs.
Buy/sell agreements often put in place a mechanism for valuing the business and a principal’s interest, and often enable the principals to fund the transfer of the business through insurance.
There are a number of ways in which a buy/sell agreement can be structured, as there can be significant capital gains tax and duty implications of a transfer.
What do you need to do?
A business succession plan is vital for any business, regardless of the principal’s age. The Australian government has recently passed legislation clarifying some of the more complex issues regarding the ownership of policies under a buy/sell agreement, so it is an ideal time to visit (or revisit, as the case may be) these issues.
We work closely with your accounting, financial and insurance advisors in relation to the preparation and execution of buy/sell agreements.
Contact us on (07) 5606 7332 to discuss this matter with one of our team today.Contact us on (07) 5606 7332 to discuss this matter with one of our team today. Visit our Commercial law Gold Coast page here and Estate planning Gold Coast page for more information.
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