Succession planning – More than an exit strategy

Although the day may be a long way off, when it comes to exiting your business, the golden rule is to start planning early.

With a detailed succession plan in place, you are the one who gets to decide how – and when – you leave your business.

You also need to ensure the viability of the business does not rely on your profile or name. By planning ahead, you’re able to slowly remove your strong links with the business so that it can function successfully without you.

Current employees and customers need to be locked into the business even if you are no longer going to be involved, otherwise buyers may be reluctant to purchase.

More than an exit strategy

A good succession plan is more than a simple departure blueprint. It should be part of your current business plan and considered when you initially structure your operation. ⁱ

Regularly updating your plan and obtaining a current business valuation helps ensure you are always prepared in the event you need to exit earlier than anticipated.

If you intend to transfer ownership of the business to a family member or employee, your succession planning needs to include decisions such as whether you intend to retain an interest in the business, or ownership of any business-related property.

A strategy for funding your successor’s purchase of the business should also be developed.

Prepare for the unexpected

Unplanned succession events (such as poor health or sudden death), also need to be considered to ensure the business can continue operating with minimal disruption.

One approach that may suit some is to establish a buy-sell agreement in which a partner agrees to sell their interest if specified trigger events (usually death or total and permanent disability) occur, with the other partners agreeing to purchase the interest. These agreements usually outline how the value of the interest will be determined and how it will be transferred, and the payment funded. ⁱⁱ

Buy-sell agreements are generally funded from the proceeds of insurance policies covering each partner, enabling easy repayment of the outgoing partner’s interest in the business.

Take your time

Although internal succession to a family member or employee can be an attractive exit option, transfer of ownership in this fashion usually requires a lengthy timeframe.

Internal succession generally involves a gradual sell down of equity to the new owner and a staged step-down by the original owner from the business.

These arrangements mean you need to ensure your successor has the right skills and capabilities to take over and continue running the business successfully. They may also require you to remain onboard for several years.

Alternatively, you may want an external sale transaction covering the whole business or its assets.

In this case there is usually a faster transition, but the purchaser may still want you to remain with the business for six to 12 months to facilitate a smooth transition.

Preparing for change

Whichever process you select, you will need to invest quite a bit of time before going to market to ensure your business presents as an attractive opportunity to potential purchasers.

Significant issues such as ensuring the current business structure is appropriate need to be addressed. For example, a business held in a family trust will require restructuring prior to any sale. ⁱⁱⁱ

Detailed and accurate information about the business and both its financial and market position need to be compiled. Most potential buyers expect to see financial statements covering at least three financial years.

Prospective purchasers will also expect your employees to be on appropriate employment contracts to ensure they stay on after the sale.

Get good advice

Key to ensuring a smooth exit from your business is getting professional advice early in the process.

We can assist you with preparing your business operations and records and help ensure you are prepared to answer questions or information requests. Issues such as the best tax structure, tax implications of buy-sell agreements and advice on how to take advantage of CGT tax concessions can be reviewed. ^iv We can also provide advice about appropriate pricing for your business, as valuation formulas vary between industries.

If you would like help with developing a succession plan for your business, contact our office today.

i  Develop your succession plan | business.gov.au

ii  Sale of a going concern | Australian Taxation Office (ato.gov.au)

iii  Small business restructure roll-over | Australian Taxation Office (ato.gov.au)

iv  Small business CGT concessions | Australian Taxation Office (ato.gov.au)