As a business owner, you deal with many responsibilities, including having to decide what to do with your business when you move on. Sometimes the logical endgame for a business is to be wound up, but in most cases, the aim is a smooth transition to new ownership. This is particularly important if you plan to either sell the business to finance your next step in life or pass it down to the next generation. In either case, the success of this transition will be partially determined by your preparation. When making your preparations, you also need to contemplate what will happen to the business if you die or become incapacitated. This article explains why succession planning for your business should form part of your estate planning.
What is Succession Planning?
Simply put, a succession plan is a statement of what will happen to your business when you are no longer involved. The plan should include the financial, legal and operational steps involved in any of the likely scenarios that end your involvement in the business. It may also include asset protection for your business, such as “key man” insurance to enable your business to survive the loss of yourself or other significant people.
Selling
If you plan to eventually sell your business, the succession plan may specify the potential buyer, what might be included in the sale, and when you would ideally see this happening. The plan should list key legal agreements, trusts, licences, permits and registrations that will need to be complied with or updated in the event of a sale. For instance, if you have co-owners, your partnership agreement may include a requirement that other owners are given first right of refusal, or the business may involve trusts that dictate the rules of succession.
Handing Down
Perhaps the most challenging but important succession plan is the one that involves handing the business down to successors. The same questions apply as with a sale, with some additional consideration related to tax. Additionally, you will want to safeguard the business during the transition, and this may require significant advanced planning. For instance, you may implement a training program and/or a gradual transition, where the incoming owner/s begin to operate the business before your exit.
When Do You Plan Succession?
It is easy to put off succession planning if you have no immediate plan to exit the business. However, not only does succession planning ensure that you know the long-term direction you want to head with your business, the possibility of an accident or sudden illness means that every owner should have a current succession plan. As such, experts recommend that you should create a succession plan at the outset of the business. You should also review your succession plan regularly, as it may change based on factors such as the success of the business, its value if sold on the open market, or the emerging capacities or interests of the next generation.
Succession in Estate Planning
You also need to consider what will happen if you become incapacitated or die while at the helm of your business.
If You Become Incapacitated
Every adult should have a plan for someone else to manage their legal and financial affairs if they lose capacity to make decisions for themselves, usually called an “enduring power of attorney”. This document gives a person or organisation the power to run your business (including selling it) if you lose your capacity to do so. If your business is held by trusts or other instruments, you should seek expert advice to ensure your attorney will have the required authorities to make decisions.
If You Die
If you are a business owner, your last will and testament should include your business. There are tax implications of passing a business in your will, but that should not deter you. Again, as with a power of attorney, you should consult with a solicitor about the effect of any trusts or holding companies.
If you do not include your business in your will, it will be distributed under intestacy law. The intestacy process is drawn out and inherently uncertain, both of which will endanger your business in the period after your death. In addition, the person who receives the business under intestacy may not be the person you would have chosen.
A will makes it clear who should receive the business. With multiple recipients, your will may include a leadership structure and provision for the heirs to sell to each other. Your will also appoints one or more executors. These individuals will have control of your affairs from your death until the distribution of your estate. They can ensure that the business continues to operate, and any employees and suppliers continue to be paid.
To assist your executor, your succession plan should include documents that identify the assets and liabilities of the business, including intellectual property, insurance policies, key contracts, outstanding debts and loans, and a list of physical assets such as plant/equipment.
Conclusion
An effective succession plan needs to consider the financial, legal and operational requirements of your exit from your business, whether as the result of a sale, gift or unfortunate event. A solicitor can help to demystify this process and make sure that the intention behind your succession plan is embodied in your estate planning.
This is general information only and we recommend you obtain professional advice relevant to your circumstances and needs. If you or someone you know wants more information or needs help or advice, please contact us on +67 23 22123 or 1800 194 100 or email us [email protected].