In brief - All businesses should plan for transfer of ownership
There is an endless amount of information available on the internet on the "dos and don'ts" of running a family business. While the plethora of advice on this broad topic varies, business succession planning is a consistent theme. Particularly, why it is so important for family businesses and businesses generally to have one.
So, what is a business succession plan? And, more importantly, why does your business need one?
Succession planning may protect the business from personal disputes
A business succession plan comes in many different shapes and sizes.
The business succession plan that is appropriate for your business will depend on a number of factors such as the type, the size and the structure of the business.
A properly considered succession plan will (with the assistance of the appropriately drafted documents) cause a course of events to take place once you decide to exit the business voluntarily, or if something happens which forces you to exit the business (otherwise known as a triggering event).
Examples of triggering events include total or permanent disablement, death, divorce and bankruptcy. In these circumstances, the succession plan would operate for the protection of the business from becoming embroiled in disputes which are personal and do not strictly relate to the business.
Business owners should agree on plan structure and consider tax implications
There are different ways to structure a business succession plan. However, the plan usually involves owners of a business reaching some agreement about what will happen to an owner's interest in the business when a triggering event occurs, or when an owner voluntarily decides to leave the business. Some examples are (this is a non-exhaustive list):
- Buy/Sell agreement - this is a contract between the owners of a business in which they agree on how their respective interests will be transferred to the other upon a triggering event occurring, how that transfer will be funded and timing requirements. They usually contain a put and call option whereby upon a triggering event occurring, the sale of the affected owner's interest in the business is forced and the ongoing owner is required to purchase the affected owner's interest in the business. Most commonly, this purchase is funded by way of insurance which is specifically designed for this type of circumstance.
- Shareholders' agreement - this is a contract which is entered into between the shareholders of the company. It deals with how shares in the company are to be transferred upon a voluntary or involuntary exit from the business, how the transfer of shares will be funded, voting rights and powers and other administrative matters which relate to the operation of the company.
As is the case with most transfers of ownership, there can be tax implications which must be considered when determining which type of succession plan is right for your business. You should therefore obtain specific advice from a qualified accounting professional.
Financial hardship or unexpected operational changes may be avoided
Succession planning is important because no-one can predict when something might happen to cause a business partner to have to leave the business suddenly. For businesses without a succession plan, this element of unpredictability leaves the business exposed to potential financial hardship, or to operating in a way that was not contemplated.
For example, consider a scenario where your business has no succession plan in place and your business partner passes away suddenly. By his Will, your business partner's wife is appointed as his legal personal representative and she steps into the deceased's shoes as business owner. A situation like this can, at the very least, disrupt business activities and, in some extreme cases, cause the business to become completely dysfunctional due to a clash of personalities and conflict within the business. This type of scenario can be avoided by having a carefully considered business succession plan in place.
All businesses need a carefully drafted succession plan
Whether you run a family business or simply a business with trusted colleagues, giving thought to these issues is important. Taking action and discussing with your business partners what business succession planning options will be right for your business and putting such a plan in place is essential.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.