Succession planning is often treated as one of those things that business owners will get to “one day”, when they need to start thinking about it, usually when they decide they want to retire or realise the proceeds of many years of hard work.
For many owners the day when they want to sell their business may arrive sooner than expected. There are a number of trigger events that crystallise the need to sell a business, including death, illness, divorce, bankruptcy, or simply the opportunity to start again with the challenge of a new business.
All business owners should therefore give some thought to the future of their business to ensure a successful transition from a financial, personal, and family perspective.
Exit options include transitioning to the next generation, a trade sale, sale of shares, management or private equity buyout, merger, or stock market listing. In some circumstances, the business may also be closed down or liquidated.
All these options take time and planning to make the most of the business’s value.
Regardless of the reasons for selling the business, or the exit option used, some key strategies include:
Valuation
Getting a current business valuation should be part of the process. Business owners may be surprised at what the figure is and realise they need to take action to maximise the value.
To achieve the best result relationships with all stakeholders, including employees, customers and suppliers must be documented and any changes considered.
For instance, should a general manager be appointed to gradually reduce dependence on the owner? Are economic conditions such that some flexibility may be required with the timing of the sale?
Advice from accountants on tax issues such as the capital gains tax (CGT) status of the business, division 7A loans to shareholders, stamp duty, embedded losses and whether the small business CGT concessions apply should be obtained as these may affect the final sale price and how much the owner receives.
Family considerations
Even if the business isn’t being transitioned to a family member there may be some sensitive issues to consider.
For instance children or spouses may feel entitled to a say in how the business is sold, even if they have never worked in it. This should be carefully managed to prevent problems.
If the business is being sold or transferred to a family member, all arrangements should be carried out in a business-like manner to avoid conflict.
Appointing independent directors can offset family concentration and ensure fair and independent governance, remuneration reviews and conflict resolution.
Funding options should also be considered – will the business transfer at market value, at a discount, or as a gift? will share options be issued, or can a loan be paid back gradually from annual dividends?
Contracts
Sale of a business to a third party can involve long negotiations. Once a sale is achieved the contract should cover apportionment of goodwill, fixtures and fittings, and stock. Transition arrangements, restraints of trade, employee entitlements, leases, permits and patents should all be included.
Estate planning
In terms of estate planning, a review of entities will ensure tax outcomes are maximised for beneficiaries. Partnerships, companies and trusts have different structures which must be considered. Buy-sell insurance agreements can enable remaining partners or shareholders to fund the purchase of the deceased’s share of the business without financial hardship.
Superannuation
If a business sale is used to fund retirement it is important to review existing investment structures. Are assets held outside the business still suited to the risk profile and life stage of a retiree? Is wealth restructuring necessary to maximise superannuation advantages? Does the expertise exist within the family to manage retirement assets or are new professional financial advisers required?
The sale or transfer of a long standing family business is a major event. The wide variety of issues to be considered means expert advice is critical. Professional advice from an accountant, business consultant, solicitor, lender, and financial planner can add significant value to the process.
