If you have spent many years developing and growing your business, selling it on the open market may not appeal to you as much as passing it on to someone you know and trust. This is called succession planning, which is all about ensuring the ongoing success of your business through a co-ordinated transfer of ownership and control. A succession (or exit) plan should also minimise the income tax, capital gains tax and stamp duty implications of transferring assets on death, incapacity or other event.
A major cause for concern, given there is now less than a 5 year window until the bulk of Australia’s baby boomers are in their 70’s, is that 81.1% of baby boomer business owners in Australia have not completed succession plans according to research conducted by Pitcher Partners and Swinburne University. Business owners who don’t have a succession plan are putting a lot at risk if they hope to someday cash out at a fair price and/or ensure their businesses survive them.
Business succession planning is a complex process. It will usually involve consultation between you, your lawyer, your accountant and your financial planner, and takes time to put in place. The amount of time it takes is often dictated by the size of the business and the particular issues involved. It can also be emotionally wrenching, often involving emotionally difficult issues such as deciding whether a relative or long-time employee is most qualified to eventually take over.
Succession planning is even more complicated when you are involved in a partnership, a trust with other people or own a share of a private company. It is imperative that you have an agreement in place with all the parties on what will happen on the death, incapacity or retirement of one of the parties.
A business succession agreement may take one of the following forms:
• partnership agreement
• shareholder’s agreement
• stakeholders agreement
• buy-sell agreement
• equity agreement
In the case of death or incapacity of a partner or a shareholder in a business, it is common for the buyout of the deceased or incapacitated partner or shareholder to be funded by insurance. Such agreements need to be carefully drafted to avoid adverse taxation consequences.