Don’t leave your business succession to chance – exit on your own terms.
It may seem extraordinary but, according to a KPMG report, more than half of Australian family businesses don’t have an exit strategy in place for their current managing director or CEO1.
Perhaps you think you don’t need a formal succession strategy because you intend to sell your business one day, or you hope to pass it on to family members? The hard truth is, there may be fall-outs with family, or your planned successor may not wish to take over. What’s more, if you’re planning to sell, you may not receive an offer close to or matching what you think your business is worth.
You may also be forced to make an unplanned departure, in the case of an illness, disability or death. According to the Australian Bureau of Statistics, one in five (21 per cent) older Australians cite personal health or physical ability as their reason for retiring2.
The good news is, whether your business exit is planned or unforeseen, a well-considered succession plan can ensure your exit is as smooth as possible, while protecting you, your family, and everything you’ve built over time. Here are five simple steps to put your plan in place, starting today.
1. Focus on the structure
Whether you want to run your business as a sole trader, partnership or company, or set it up as a trust, it’s important to realise the long-term impact of whatever structure you choose on your succession plans3. For example, in a partnership agreement, each person is usually liable for the debts of the other partners incurred during the business – even after a partner has left – whereas there is usually limited legal liability in a company shareholder structure4. While trusts may be complex, they can offer you tax benefits.
In fact, each type of business structure has differing legal and tax obligations that will directly impact any partners who wish to cash out of the business and monetise their stake, as well as those who wish to remain5.
You will also need to ensure you have a written business owners’ agreement, which is known as a shareholders’ agreement if you’re trading as a company. The business owners’ agreement outlines each partner’s obligations and rights, decision-making processes, dispute resolution, terms for termination, and the division of profits and losses.
If you’re just starting out, it may be tempting to opt for the cheapest, simplest business structure available. But doing so could cost you down the track, should you have to alter the structure as your business evolves and your valuation increases. If in doubt, seek expert advice.
2. Be in agreement
Perhaps the most important document of all is the ‘buy-sell’ agreement, which details what happens to a person’s shares in the business should they die, become disabled or suffer a trauma. It also details who can buy the departing owner’s share of the business and at what price, and may be coupled with a ‘funding mechanism’, which covers how the agreement is to be financed if a partner exits the business.
A buy-sell agreement doesn’t have to be its own separate document. You can make it part of your partnership agreement or your company’s shareholder agreement.
However, keep in mind that the two are important in their own right. While a shareholder agreement may outline the responsibilities and obligations of the partners in a business, it doesn’t usually outline what will happen in the event of a buy-out, disability or death.
A buy-sell agreement also isn’t simply for business partners. It may also be relevant to a sole proprietor, particularly if they want someone to step into their shoes one day.
3. Identify your key people
It isn’t easy to think about stepping out of your business, especially if you’ve built it from the ground up, but identifying leadership potential and bringing them into your inner circle will make a big difference during a handover.
You may wish to formally identify a successor, or your key talent, in your business plan, and ensure he or she is knowledgeable in the day-to-day running of the business.
This is just as important if you have a family member in mind. Indeed, it may be more important. You don’t want to create discord among the younger generation if more than one person wants to take over your business at some point. Then again, you want to be confident that there is someone capable and willing to fill the void.
According to KPMG, 60 per cent of Australian family businesses plan on leadership passing to a family member1. If this sounds like you, then a family charter is a great idea. It should clearly spell out how decisions are to be made, the terms and conditions for payouts, and perhaps even estate equalisation for family members who won’t inherit the business.
4. Document your business
A business that is well-documented, with clear systems and governance in place, makes it much easier for the next in line when they come to take charge.
Ensure that you have up-to-date documentation, such as terms and conditions of trade, IP protections, trademarks, employment contracts for staff, insurances, leasing or sub-leasing agreements, business plans, and wills for owners.
It’s not uncommon either to include an estate plan; a timeline for the transfer of power; and an accurate, independent valuation of the business.
These documents should ideally be updated regularly and stored in an accessible place for your key staff to access.
5. Seek outside help
Finally, it’s important to remember that you don’t have to do this on your own.
Planning for business succession may seem overwhelming, but if you seek the right expert advice from lawyers, accountants and advisers as early as possible, you should save yourself a lot of heartache – and money – down the track.
Collaborating with experts openly and transparently is not just an invaluable investment in the success of your venture, it gives you the peace of mind that your business will remain in good hands.
MLC’s financial advisers' take a holistic approach to advising clients on what they need in place to ensure the smooth transition of their business – whatever your circumstances.
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