As a business owner, you deal with many responsibilities, including having to decide what to do with your business when you move on. Sometimes the logical endgame for a business is to be wound up, but in most cases, the aim is a smooth transition to new ownership. This is particularly important if you plan to either sell the business to finance your next step in life or pass it down to the next generation. In either case, the success of this transition will be partially determined by your preparation. When making your preparations, you also need to contemplate what will happen to the business if you die or become incapacitated. This article explains why succession planning for your business should form part of your estate planning.
What is Succession Planning?
Simply put, a succession plan is a statement of what will happen to your business when you are no longer involved. The plan should include the financial, legal and operational steps involved in any of the likely scenarios that end your involvement in the business. It may also include asset protection for your business, such as “key man” insurance to enable your business to survive the loss of yourself or other significant people.
Selling
If you plan to eventually sell your business, the succession plan may specify the potential buyer, what might be included in the sale, and when you would ideally see this happening. Planning to sell a business can take time, as you will want to achieve the best possible outcome. It may also require a review of critical arrangements in place, such as franchise agreements which may include provisions impacting on a proposed sale. If you operate via a company, there could be provisions in a Shareholders Agreement which give other shareholders rights, including a first right of refusal.
Handing Down
Perhaps the most challenging but important succession plan is the one that involves handing the business down to successors. The same questions apply as with a sale, with some additional consideration related to tax. Additionally, you will want to safeguard the business during the transition, and this may require significant advanced planning. For instance, you may implement a training program and/or a gradual transition, where the incoming owner/s begin to operate the business before your exit.
When Do You Plan Succession?
It is easy to put off succession planning if you have no immediate plan to exit the business. However, not only does succession planning ensure that you know the long-term direction you want to head with your business, the possibility of an accident or sudden illness means that every owner should have a current succession plan. You should also review your succession plan regularly, as it may change based on factors such as the success of the business, or the participation of the next generation in the business.
Succession in Estate Planning
You also need to consider what will happen if you become incapacitated or die while at the helm of your business.
If You Become Incapacitated
Every adult should have a plan for someone else to manage their legal and financial affairs if they lose capacity to make decisions for themselves, usually called an “enduring power of attorney”. This document gives a person or organisation the power to run your business (including selling it) if you lose your capacity to do so. If your business is held by trusts or other instruments, you should seek expert advice to ensure your attorney will have the required authorities to make decisions.
If You Die
If you are a business owner, your last will and testament should be prepared with thought to how the business is dealt with, how control is passed on, and what you want to happen to the business after your death. As with a power of attorney, you should consult with a solicitor about the effect of any trusts or holding companies.
Failing to consider your business when preparing your Will could create uncertainty or even result in it being handed to the wrong person. If it is an asset of your estate, and you die without a Will, then the intestacy laws will apply. This means you won’t determine who gets the business.
Conclusion
An effective succession plan needs to consider the financial, legal and operational requirements of your exit from your business, whether as the result of a sale, gift or unfortunate event. A solicitor can help to demystify this process and make sure that the intention behind your succession plan is embodied in your estate planning.
This is general information only and we recommend you obtain professional advice relevant to your individual circumstances and needs.
If you or someone you know wants more information or needs help or advice, please contact us on (07) 4724 1016 or email .
