Business succession planning is a crucial aspect of an efficient business operation. A business owner’s calculated exit ensures the owner departs on their own terms and protects their interests, achieving desired outcomes while coordinating appropriate succession strategies which safeguard the continuity of the business. A business succession plan also creates for a headache-free transition period as all risks are considered, and some mitigated, prior to the departure of a business owner. So, what exactly is a business succession plan?
What is a Business Succession Plan?
A Business Succession Plan is a document addressing the intentions of a business owner in certain situations where the owner of the business, by choice or by operation of law, changes hands.
What should a Business Succession Plan address?
There are four main areas in a Business Succession Plan:
Business ownership may take form in various ways including:
i) sole proprietorship;
ii) a partnership;
iii) a private company; and
iv) a trust.
Regardless of your ownership structure, it is important to define your vision to assure the future of the business – providing clarity and certainty for the departing owner/owner’s, continuing partners, staff and all families involved.
Illness, an accidental event or death must also be considered as a possibility and in this case -provided the business will continue to operate once the owner departs – choosing a successor is essential. By making these decisions now it will ensure the best interests of the business are protected moving forward. Identifying the successor/s in the business succession planning process will ensure the transfer of ownership or control of a business is smooth, reducing potential risks and complications.
For example, most owners would want to ensure that their family received the true value of their share of the business in the event of their death. They would also want to ensure that there are no undue complications in obtaining that value. A well-crafted business succession plan allows for this. The absence of a business succession plan means that the spouse of the deceased may well have to negotiate with the surviving owner in order to receive the true value of the deceased’s stake in the business.
The unexpected death or departure of a significant figure can have detrimental impacts on the transactions and earnings of the business. This may present adversity as the business may well be faced with staff training costs, impacts on the current client base, a decrease in turnover and revenues and negatively impact upon the goodwill of the business.
A suitable insurance policy for each key figure of the business may address any decline in revenue. The member in which the insurance policy is held and to whom the proceeds are paid can be addressed in the business succession plan.
A business succession plan addresses the outstanding debt a business owner or partner may have by establishing strategies to effectively deal with the repayment of debt. Business owners often have bank loans known as overdrafts or commercial credit cards which aids the everyday operation of the business. These loan figures can become quite significant so the implementation of a business succession plan is important as it will define how the repayment will be managed. This may occur through:
i) The use of business capital;
iii) A new partner purchasing a stake in the business; or
iv) An insurance policy (transfer of financial risk).
We can assist you with the assessment of each option to identify the best course of action, relative to your unique business context and requirements, ensuring the debt is retired by the successors in control.
Minimisation of Tax
The strategies adopted in a business succession plan may also help reduce the tax involved in any transfer of business proprietorship or control.
Who needs to be involved?
There are three key participants (apart from the owner’s, of course) in devising an appropriate business succession plan:
The solicitor is responsible for preparing the documentation to encompass the Business Succession Plan. Part of our role, as solicitors, in this process is assisting the business owner formulate the most suitable business structure - reflecting their needs and interests. We will ensure that your business succession plan is equipped to deal with the various matters mentioned above and provides for an efficient ownership transition.
To book an appointment with us today, call us on 07 4638 5541, or come in and see us at 193 Hume Street, Toowoomba.