Even for family businesses, succession planning is crucial!

 

In summary – all businesses should prepare for ownership transfers.

 

On the “dos and don’ts” of managing a family business, there is an unlimited supply of material online. Although there is a wide range of advice on this vast subject, business succession planning is a recurring theme. Specifically, why having one is crucial for family businesses and enterprises in general.

 

A business succession plan is what, then? What’s more, why does your company require one?

 

Planning for succession could shield the business from interpersonal conflicts.

 

There are numerous variations in the size and style of a business succession plan.

 

Your business nature, size, and organizational structure will all have an impact on the business succession plan that is best for you.

 

Once you decide to leave the business voluntarily or if something occurs that compels you to leave the business (also known as a triggering event), a properly thought-out succession plan will (with the help of the carefully designed documentation) cause a train of events to take place.

 

Death, divorce, total or permanent disability, and bankruptcy are a few examples of triggers. In these situations, the succession plan would take effect to safeguard the business from getting involved in disagreements that are personal and do not directly concern the business.

 

Business owners should come to an agreement on the plan’s structure and take tax implications into account.

 

There are different ways to structure a business succession plan. However, the plan usually involves owners of a business reaching some agreement about what will happen to an owner’s interest in the business when a triggering event occurs, or when an owner voluntarily decides to leave the business. Some examples are (this is a non-exhaustive list):

 

• Buy and Sell Agreement – This is an agreement between business owners that details the timing, funding, and method by which their respective interests will be transferred to the other party in the case of a triggering event. Typically, they include a put and call option that, in the event of a triggering event, forces the affected owner to sell their stake in the business and obligates the remaining owner to take over that stake. Most frequently, this purchase is covered by insurance that is intended for just such a situation.

 

• Shareholder’s Agreement – This is a contract that the business shareholders have agreed to. It covers voting rights and powers, as well as other administrative issues related to the business operation. It also covers how shares in the business are to be transferred upon a voluntary or involuntary retirement from the business, and how the transfer of shares will be supported.

 

When deciding which form of succession plan is best for your business, take tax consequences into account as they might arise with most transfers of ownership. As a result, you ought to seek specific guidance from an experienced accountant.

 

Financial difficulty or unanticipated operational adjustments could be prevented.

 

Because no one can predict when anything might happen that would force a business partner to leave the business unexpectedly, succession planning is crucial. Businesses without a succession plan are susceptible to potential financial difficulties or to operate in a way that was not planned for by this element of unpredictability.

 

Imagine, for instance, that your business has no succession plan and that your business partner passes away unexpectedly. Your business partner’s wife is named in his will as his legal personal representative and takes over ownership of the company on his behalf. Due to a clash of personalities and internal strife, a situation like this could, at the absolute least, impede business operations and, in certain extreme cases, render the company utterly dysfunctional. By having a well-thought-out business succession plan in place, this kind of scenario can be avoided.

 

Every business needs to have a carefully written succession strategy.

 

Considering these challenges is crucial whether you manage a family business or just a business with dependable partners. Implementing a business succession plan requires taking initiative, talking with your business partners about the possibilities that will work best for your company, and putting a plan in place.

 

The HAZELEGAL team can assist you in making or reviewing your Will in whatever circumstances are. Please contact us at (03) 9028 7603 to talk about your Will or any other estate matters that are concerning you.

 

DISCLAIMER

This is a commentary published by HazeLegal for general information purposes only. This is not meant to be taken as particular advice. You should seek your own legal and other advice for any question, or any specific situation or proposal, or get in touch with the writer at http://hazelegal.com.au before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories.

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