For many business owners, their succession plan is a conversation held with a spouse over coffee and a few loose paragraphs that an advisor has put together at some point. It exists in fragments. It rarely exists on paper as a single coherent document, and it almost never survives the day one of the seven predictable events actually lands. We call these events the 7 Ds - Death, Disability, Divorce, Default, Departure, Disagreement, and Deadlock.
In this article, we will walk through what a workable business succession plan actually covers and provide some practical tips to help succession planning move from the bottom of the to-do list to the top.
What business succession planning actually covers
Business succession planning is the work of writing down what happens to your business, your wealth, and the people who depend on both if you can no longer run the business the way you run it today. That day may come because you have chosen to retire, because you have accepted an offer to sell, or because one of a small handful of events has landed earlier than you expected. Death is the one everyone talks about, but is not usually the one that arrives first.
Succession planning is not the same as personal estate planning, and the two are frequently confused. Your Will deals with your personally held assets on your death. Business succession planning deals with the ownership, control, and continuity of the entities through which you actually run the business: the operating company, the discretionary trust that owns key equipment, the SMSF that holds the premises, and often a bucket company sitting behind all of it. Both types of planning are needed, and all of your key documents need to talk to each other.
The three questions every workable succession plan answers
Whatever the size or shape of the business, every plan that we have seen hold up under pressure answers these three key questions:
1. What do you own, and how do you own it? Many owners struggle to give a clear answer to this question, and it is not their fault. Businesses grow in layers. A company here, a discretionary trust there, a piece of land in a spouse's name because an advisor suggested it in 2011, an old service trust that stopped being useful five years ago but has never been formally wound up. A structural review that maps what you actually own is often the first useful step, because every downstream decision, from drafting your shareholders’ agreement to tax modelling to estate planning alignment, depends on it being right.
2. Who controls it? Ownership and control are not the same thing, and the difference matters most where trusts are involved. The appointor of a family trust holds the power to remove and appoint the trustee, which makes the appointor the seat of overarching control. If a family trust plays a part in a business structure and the business owner cannot state who the current appointor is and who takes over if that person dies or loses capacity, their succession plan has a gap.
For companies, understanding the interaction between the board of directors and members is critical. If one or more companies in the business has a sole shareholder and sole director, the need to plan for the unexpected is even more critical. Putting in place a plan to ensure control and operations can continue through appointing alternate directors, executing a company power of attorney and ensuring personal estate planning is aligned can be the difference between a smooth transition during a stressful time and an outright disaster that can cripple the business.
3. What happens if you can’t do the job anymore? This is where your business succession plan meets your personal estate plan. If control of the business depends on one or more people being in the driver’s seat, and those people are suddenly incapacitated, someone else has to step in with the authority to sign documents, operate bank accounts, carry out contractual obligations, and keep suppliers paid. That authority has to exist in writing, in advance, and usually takes the form of a company power of attorney and an enduring power of attorney.
Practical steps that business owners can take now
Whether a succession plan is scribbled down in a notebook or stowed away in a filing cabinet, we recommend doing these five things sooner rather than later:
- Locate the current versions of key documents. By this we mean company constitutions, family trust deeds (including every variation), superfund deeds, shareholders agreements or the buy-sell agreement if one exists, and current estate planning documents. If one of these documents cannot be found, treat that as its own finding.
- Write down, in a single sentence for each entity, who currently controls it and who takes over if that person dies or loses capacity.
- Confirm with your accountant which entities hold value, and whether the last formal valuation is still within useful range.
- Book a conversation with your lawyer and your accountant in the same room, or the same video call, with the documents from step 1 in front of everyone.
- Do not wait for the perfect moment. The succession plans that get written are the ones that get started in an ordinary month, not in the midst of a crisis.
