While most people will spend considerable time making a will to distribute their personal estate to their loved ones after they pass, far fewer people consider a succession plan for the business they have built during their lifetime.

In Australia, on average, less than one third of family businesses have considered a business succession plan and less than one ninth of such businesses have actually documented such a plan. This statistic is sobering given the problems that can be created if a proprietor dies suddenly without indicating how their business affairs were to be administered after their death. Moreover, it’s estimated as many as 1.4 million business owners contributing almost $500 billion to Australia’s GDP will come into retirement age in the next decade.

In this article we’ll look at seven key areas a business owner needs to consider in creating a succession plan. If you have questions or concerns as a result of this information, or need help creating a business succession plan, please contact our Strathpine business succession planning experts at Big Law for more in-depth guidance.

1. Recognising the need for a plan

Many business owners are so busy building and running the enterprise, they do not have time to consider what happens when they retire, become incapacitated or die. An effective business succession plan should be created early on and not rushed. Moreover it should involve all stakeholders – family members, business partners, managers, trustees, employees and anyone else relevant should be involved in communications about the plan and its implications.

An effective plan will pre-empt a number of scenarios under which the owner leaves the business, from death to illness, accidents, pregnancy or other family responsibilities, while ensuring the enterprise continues uninterrupted or is sold to business partners or others, or passed on to the next generation of family members.

Once created, the plan – like a person’s will – should be reviewed each year to ensure it is still fit for purpose and accurately reflects the owner’s circumstances.

2. Sorting out personal assets from business assets

In building a business, some owners become confused about what assets are personal assets – which they may bequeath to family members via their will – and which are assets belonging to the company and/or a trust controlled by business partners that cannot be devised by a will. A well drafted business succession plan will provide clarity on how assets are held, reviewing trust deeds, the company’s constitution, shareholder agreements, buy/sell agreements, and deeds of variation to determine who controls these entities once the owner exits the business. This is particularly important in family businesses where younger generations of the family wish to gain control of the company, despite the presence of non-family business partners.

3. Correctly valuing the business

Knowing what the business is worth can help clarify many of the issues involved in business succession. A business’ value may have risen substantially between the time the owner or owners started the business and the time they wish to exit. An accurate valuation is important both for potential third parties interested in taking over the business – if that is a preferred succession option – or for a successor within the business, such as a family member who already works within it.

4. The importance of Power of Attorney and other important company documents

It’s not uncommon for a business owner to work beyond retirement age, particularly if they have spent their life building up the venture. In any event it’s essential for a business owner approaching retirement age and considering a business succession plan to ensure there is a Power of Attorney document in place, appointing a trusted person to make financial, legal, guardianship, and medical decisions on their behalf if they become incapacitated and are unable to make such decisions. This is a crucial document for a business owner as it empowers the attorney, potentially, to carry out key elements of the business succession plan. Lack of a Power of Attorney document can leave such big decisions to a possible guardian or administrator not of the owner’s choosing.

The succession plan itself should also be a clear, accessible document with timeframes for completion and responsibilities set out for the relevant people. Other important documents should also be included in the plan and key people aware of their location, including the personal will and Enduring Powers of Attorney for the current owner, Power of Attorney for any company the owner is a director of, any shareholders’ agreement, leasing or sub-leasing agreements, sale of business agreement, employment contracts, ASIC documents for the transfer of shares and directorships, partnership agreements and intellectual property protections (logos, patents, etc).

5. Consider the tax implications

Any succession plan must consider the tax implications in transferring the business to a new owner. Different approaches to succession will have different tax consequences for the owner and beneficiaries. Transferring control of the business to family members, for example, may involve restructuring the business through changed shareholdings, trust and partnership structures, or creating a new trust through which to transfer assets, for example. Such changes have legal and tax implications, most obviously capital gains tax on the sale or transfer of business assets. There may also be GST and duties to be paid.

6. Determine your exit strategy

A key reason for considering business succession well before the time comes to leave the business is to plan for all possible contingencies, from sale of the business to retiring, falling ill, becoming incapacitated or dying. The method of exit will help determine what should be included in the succession plan – encompassing the owner’s will, insurance, superannuation, shareholders’ or partnership agreement, family trusts and more.

7. Seek the right advice

Working out the best way to leave a business ideally requires a range of legal, financial and corporate advice. An accountant or financial adviser can advise on the important tax considerations involved, while a business management consultant can help advise on the form of the plan and how it can help minimise disruption to the enterprise.

Strathpine Lawyers in this area such as Big Law, meanwhile, can provide oversight on all of the above based on your business structure and who you wish to succeed in running operations. If you have questions about any of the content discussed in this article, contact our professional team today for respectful and understanding consultation.