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Business Succession planning critical

Why business succession planning?

business succession planning agreement reached

Business Succession Planning is to all stakeholders – business and personal.  It is an important way to provide peace of mind and the comfort of financial independence to:

  • the family,
  • partners and
  • business stakeholders of the entrepreneur(s) in control of the business.

Such planning ensures that there is an orderly process prescribed for enterprise governance succession. Such continuation following the departure of an owner is reassuring to lenders, clients, suppliers and is a risk mitigation strategy.

At its simplest, business succession is the act of a business transferring from one owner to another.

This succession can take place during one’s lifetime, for example by a sale, or transfer to a family member.  It can also be forced, following the death of an owner.  During the period of control by an owner, succession could be to:

  • an ‘entity’ controlled by them (and/ or members of the family),
  • a coalition of owners (that could include family members); or
  • out of the family’s ownership and control altogether.

(Our references to an owner apply similarly to a part-owner in respect of their ‘share’ of the enterprise equity.)

Is a partnership with your business partner’s spouse and children in your best interest?

There are several important considerations when individuals ‘go into business together’: a Business Succession strategy is one of them.  The form of business structure is irrelevant, whether in their own names, or in entities such as Trusts, Companies etc.

People who contemplating business ventures with non-family member partners usually seek financial advice in the process.  A question that exercises their mind is regarding the future of their family let alone the business, should any one of the partners –

  1. meet an untimely demise or
  2. suffer an impairment to their ability to function.

Consider the circumstances of the following Case Study and relate it to your own business structure(s). In considering this Case Study, bear in mind that:

  • whilst your business partner and his life partner may be good ‘friends’, they may not make the best of business partners;
  • their skills, business/ financial objectives could change after the event;
  • their attitude could change after the influence of you’re here-to-before partner’s ‘demise’; or,
  • you might think of them and react to them differently in the changed circumstances.

Case Study: a professional practice

Consider the situation where a professional partnership comprises a partner in his late-50s and a partner in his mid-30s.

The older partner is eyeing off retirement; the younger partner is eyeing off a larger share of the profits.  Because of his personal and community involvements the younger partner is generating a higher level of fees.  There is a disconnect between the perceived value of the respective shares in the partnership arrangement. In the absence of a well-considered, funded Buy-Sell Agreement, a financial disaster awaits the families should either of these people suffer a death or disablement event.

The business in this study carries some commercial debt in respect of business operating costs and equipment finance.  The debt is personally guaranteed by the individuals (and in the event, their respective spouses).

The termination of either partner, whether by death or permanent disablement, could jeopardise the business/ life goals of the survivor.  A well-documented business succession plan, accompanied by realistic provisions as to how such events should be dealt with, will substantially reduce the financial risks to the business.

The cost of a funded Business Succession agreement would be relatively minor compared to the potential legal costs absent same.  Funded, where appropriate, includes the cost of relevant risk protection insurances.

What does the formulation of a business succession plan entail?

It is a process whereby arrangements are pre-agreed for detailed, foreseen circumstances.  A Business Succession Plan plan will usually require documenting:

It is evident that considerable discussion is required, together with a substantial level of goodwill, to agree on suitable terms.  Doing so will ensure that what is agreed will stand the test of time.  As with most long-term plans these agreements should be reviewed/updated regularly.

Where can you obtain business succession planning advice and support?

The annual cost of a funded business succession plan needs to be considered.  In our experience, it is potentially less than the amount of the superannuation guarantee contribution for the average Australian worker.   For this investment most small business stakeholders would be protected against the risks faced by our Case Study client above.

The process of planning should involve:

  • an experienced financial planner,
  • an accountant/ business adviser – and
  • a lawyer.

The advisers at Continuum Financial Planners Pty Ltd are experienced in advising in this field.  Added good news is our connection to professional advisers in the accounting and legal fields also experienced in Business Succession planning.  We can collaborate in and coordinate the construction of the most appropriate plan for your circumstances.

The need for Business Succession Agreements for all businesses operated and/ or controlled by parties from more than one family unit is undeniable.  Furthermore, the scenarios that can be protected in this way are not gender specific. The anxieties regarding business succession are no less for businesses engaged in a range of activities and industries.

Arranging a business succession planning meeting-

Continuum Financial Planners Pty Ltd has experienced advisers available to assist with your business succession planning.  Ensuring our advice is suited to your individual and specific needs: ‘we listen, we understand; and we have solutions’.

To arrange a meeting to facilitate personalised, professional wealth management advice on this topic use the following contacts:

  • phone our office on 07-3421 3456, or
  • use our linked Book A Meeting to arrange an appointment to discuss business succession planning,

to ensure that your business partner(s) – and your family – have the peace of mind that goes with sound financial planning and a stable business environment.

(This article was originally posted in June 2012; it has been refreshed occasionally, most recently in August 2024.)