Business Succession Planning
Business & commercial law
Being in business has its risks. We want to help you ensure the ongoing success of your business if an unexpected event prevents you from continuing to operate your business or you decide to exit the business for other reasons.
For many business owners, the thought of handing over control of their business can be a confronting concept. A business succession plan can give business owners peace of mind that their business will continue to prosper even after they are no longer involved with it.
Planning for the unexpected is a valuable instrument in any business. It provides peace of mind to all partners and also creates security for business financiers.
We often find financiers insist on a business succession plan before providing any funds to a business. A business succession plan will comfort the financier and make any finance application easier.
Although business owners can be tight on time when dealing with the demands of running a business, it is important to take the time to plan ahead and ensure the long-term survival of the business, preserving the wealth that has been built up, and planning for a change of management or leadership to minimise disruption to the business.
A business succession plan should define who will take over the business, when that person will take over, and how they will operate the business in the event one of the owners choses to exit the business, or loses the capacity to run the business in the event of illness or death.
Our expert business and commercial lawyers are ready to assist business owners in putting the most suitable plan in place to secure the future of their business. We understand that no two businesses are the same and that a personalised-approach to planning for the future is imperative to ensure that your business can function without you.
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A Business Succession Plan is a plan that allows you to outline who will take over your business and how it will operate to ensure its continuity if one of the owners of the business is to exit the business due to retirement, a severe illness, or death.
The plan will look at the legal interest each owner of the business has in the business and their rights and responsibilities.
The plan will also include mechanisms to give continuing owners the right to buy the interests of a deceased or disabled owner, and the departing owner or their estate, the certainty of a pre-determined price for their share of the business.
A Business Succession Plan can utilise various tools to ensure all related issues are considered, including:
- Buy/Sell Agreement (which determines who can buy who out and when, and what that process will be.)
- Partnership/Shareholders Agreement (this is a working document that is active whilst the business is in operation and the partners are still in business. It deals with the day to day running of the business with exit strategies.)
It is important to regularly review your business succession plan to ensure it continues to be appropriate.
A Business Succession Plan should address, at a minimum, the following:
- The interest of the departing partner
- The interest of the surviving partner
- The affect of personal guarantees provided by the departing partner
- The terms of any finance arrangements and the potential requirement for additional security if one partner exits the business.
To deal with the issues raised above, we recommend business owners enter into a Buy/Sell Agreement. In effect, this Agreement is a Business Will that provides for the business continuance after the happening of an event with minimum interruption.
A Business Succession Plan can:
- Give the business every chance of survival if any partner dies or suffers a permanent disability or trauma (an “event”).
- Ensure that family members receive the actual value of the interest of that partner.
- Allow for ownership transition without the additional financial burden to compensate the relevant partner or their estate for their share in the business.
- Bear comfort to all persons involved, including employees and the financier of the business.
- Organise the affairs of the business to reduce unnecessary capital gains tax, stamp duty and income tax for the remaining partners and the beneficiaries of the partner that suffered the event.
A Buy/Sell Agreement only activates on the happening of an event, and the relevant date is the date of the event. This date is important from a tax and duty perspective.
The following are some issues that should be addressed in a Buy/Sell Agreement:
- Parties to the Agreement – including spouses and beneficiaries
- The events which will trigger the working of the Agreement
- Put and Call options
- How to determine the value of a partner’s interest in the business
- The most suitable funding mechanism to finalise the transfer of the business