Succession Planning For Your Business


Guest post by our Certified Financial Planner, Mark O'Flynn

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Succession planning for your business

Having a business succession plan plays an important role in ensuring both the business and its owners are protected in the event of an owners exit.  Such agreements assist to preserve the business and ensure the outgoing owner receives an amount representative of their equity in the business, which is critical in the context of retirement planning for the outgoing owner.

Start Planning Early

It is critical to put a plan in place ahead of time to reduce the impact of both expected (retirement) and unexpected events (death or disability) that lead to the exit of the owner of a business. This may include an understanding and engagement strategy with potential successors to your business including internal employees, family members and industry or financial (eg. Private equity) firms.

Obtain a Realistic Valuation - seek an independent valuation

Valuing unlisted businesses can be difficult so it is important to have a realistic valuation and an appropriate method of valuation to understand what your business is worth.  This is critical when selling a business is part of a retirement plan and should be done via an independent valuer. A valuation is often required for buy/sell arrangements and supporting insurance.

Shareholders and Partnership Agreement

A shareholders agreement is a contract between the individuals who have an interest in a business and can detail how the business is run, funded and exit strategies for the owners. This often includes a buy/sell agreement detailing the orderly transfer of ownership under various events including retirement, death and disability. A good agreement should cover all potential exit events and is best prepared by a legal practitioner.

Write down key information – it’s free!

Often one spouse will be more involved in a business than the other. Therefore, it is critical that in addition key formal documents such as Wills, Enduring Powers of Attorney and Shareholders Agreements, an informal plan is outlined so the less involved spouse knows what to do if unexpected events arise. This may include key people to speak to, contact details, passwords, supplier details, key staff members to engage and negotiating tactics.

Preparing for sale – make yourself redundant!

Businesses will typically have a higher value when they are less reliant on the owner or principal, and in turn, the value is derived from the company goodwill and branding. Therefore, in preparing to exit a business, the owner or principal should be looking to remove themselves from the ongoing operations of the business so the business can operate on its own. This can take long-term planning and putting in place systems, processes and key staff.

It is also critical to have a clean set of financial statements for the potential acquirer to review. While there may be some flexibility to have the business pay for some expenses, remember this may reduce the reported profit the potential buyer is looking at which could lead to a lower valuation.

Don’t pay too much tax – Small Business CGT Concessions

Selling a business can lead to significant tax consequences. However, careful tax planning can minimise the amount of tax paid if you are able make the most of the generous, but complex, small business capital gains tax concessions. You should seek professional advice from a qualified accountant and financial planner in order to understand how to best apply the small business CGT concessions in your circumstances.