It is crucial for business owners to consider business succession planning to ensure the smooth transition of their business to the next generation, and to ensure that their business and hard-earned assets are protected along the way. Here are some key business succession issues that business owners need to consider:
Identifying the successor
Business owners need to identify who will take over the business once they retire, and ensure that the chosen successor has the necessary skills, experience, and commitment to run the business. For some businesses, there will be a natural successor – maybe the child(ren) who has been working in the business for years, or key employees who have shown their willingness to continue running and growing the business. If there is nobody easily identifiable as the natural successor, then maybe passing the baton to the next generation may not be a possibility, and other options need to be considered. This might include the sale of the business to an interested party who will keep operating it or merge it with their own business, or a sale of business assets with a view to shutting down for good. This is an important first step, to ensure that the ‘succession roadmap’ has been carefully considered and so that time and money are not wasted on putting in place a succession plan that ultimately will not be implemented.
Developing a succession plan
Once the successor has been identified, business owners should develop a clear and comprehensive succession plan. This step is critical, as there is no use having a successor lined up with no plan as to how the transition of control of the business will run. The succession plan should outline the:
- Timeline for the transition;
- Strategies to transfer ownership; and
- Roles and responsibilities of all parties.
Perhaps the successor needs to meet certain milestones, such as attaining higher education qualifications or demonstrating the skills required to successfully take on the business, such as meeting certain metrics or KPIs.
If the successor is an existing co-owner, then owners could consider obtaining insurances and putting in place a ‘Buy-Sell’ Agreement that sets out a contingency plan in case of unexpected events such as death, disability, or illness, and even issues like divorce, separation or one owner simply deciding not to turn up to work anymore. This will ensure that the ongoing business partner has funding available to them to purchase the outgoing partner’s share of the business.
Business owners need to ensure that the transition of ownership does not lead to a loss of key employees, who may be critical to the success of the business. Offering incentives and clear communication can help mitigate this risk. The treatment of employees as part of the ownership transition should form part of the succession plan.
Legal, accounting and financial advice should be sought to ensure that the succession plan is clear and effective.
Financing the transfer
This step ties in with necessity to develop a succession plan. Careful consideration needs to be given to determine how the transfer of the business will be financed, whether through cash, shares, debt or some other way. This will depend on the financial situation of both the business and the successor. For example, some business owners will be prepared to provide ‘vendor finance’ if the successor is a family member or close key employee.
Any funding arrangement should be drafted by advisors to ensure that the interests of both parties are protected. As part of this, all parties need to consider the tax implications of the succession plan. It is recommended to consult with a tax professional to determine the best strategy for managing taxes and ensuring the transaction is as tax-effective as possible. Even if there is no financing required (i.e. the transfer of the business will occur without payment by the successor), legal and accounting advice is critical to ensure this arrangement is appropriately documented.
An opportunity to restructure and get your ducks in a row
Getting the business ready for the next generation is also an opportunity to consider whether the business structure can be enhanced or restructured in any way, and whether any key documents are missing. For example, it may be an opportunity to consider utilising small business restructure rollover relief to move into a different, more modern structure. It is also an opportunity to review existing business documentation and ensure that trust deeds, company constitutions, leases, employment contracts and other key documents are up to date and in place.
Personal estate and succession planning
Business owners should ensure that existing estate planning documents are in place and then consider updating those documents once the transfer of the business has finalised. This is particularly important if the sale proceeds will be paid in a lump sum and then ultimately held personally. Completing the transfer is a good trigger for all parties to re-examine their estate planning to ensure it appropriately addresses their changed circumstances.
Overall, business succession planning is a complex process that requires careful consideration of multiple factors. It is recommended to work with a team of professionals, including solicitors, accountants and financial advisors to develop a comprehensive and effective plan.
