Many small business owners overlook the importance of succession planning, but it is vital if you want to preserve your hard work.
Who will take over your business?
Some of the more common scenarios that can arise when it comes to a business succession plan include:
- If you co-own your business, you may choose to sell your shares or ownership interest to the other owner. For a business with multiple owners, a common mechanism is to sell your ownership interest to the company, which is then distributed amongst the other owners. This has the advantage of ensuring the business is carried on by people with the knowledge and incentive to run it properly.
- Your partnership agreement may specify that, in the event of death or disability, the remaining owner/s have the right to buy your share. However, this can represent a financial burden for the other owner/s. Consequently, many business owners agree to take out short-term or permanent life insurance to offset or cover these costs.
- You may pass your business onto an heir in your will. This is a popular way to ensure that future generations of your family reap the benefits of the fruits of your hard work and is particularly attractive where family members already work in the business. With multiple heirs inheriting in tandem, you will need a clear leadership structure. Set out who is responsible for what and whether you envision co-ownership, or one owner with other heirs taking the remaining company roles. You should also include a buy-sell agreement so that any heirs who do not want to be active in the business can sell their shares to other heirs who do.
- You might choose to sell to a key employee. This requires a buy-sell agreement in which the employee agrees to buy your interest either at a set date or in the event of your death or disability. If finance is a problem, you might consider offering loan terms that allow the employee to pay you in instalments.
- For sales to an outside interest, an up-to-date valuation is imperative. And, as your business will not be taken over by someone familiar with its operations, you should also have a robust transition plan in place. Make sure your operating procedures are well-documented and your finances are in order.
What else should you consider?
No matter who your business passes to, there are some matters every succession plan should consider:
- The timeline of your succession plan – does it apply on a predetermined date, or in the event of death or disability?
- What the business is worth. It is important to keep your valuation up to date. There are several methods to value a business, but whichever you choose should be the one you use for updates.
- Training or knowledge your successor will need. Document your operating procedures, organisational chart, employee handbook and any other processes the new owner might need.
- Legal considerations including the transfer of legal ownership and any licences or registrations the new owner requires.
- How you will fund your succession plan to ensure your chosen successor can afford to buy the business. You might utilise life insurance, external financing or seller finance.
Do you need help with your succession plan? It can be complicated, so contact us today on (03) 9592 3356 or via email at office@citypacific.com.au and let us help you prepare your business for the future.
