Most business owners who’ve worked hard to establish their business, want to see it continue to thrive after they leave.
A succession plan, or exit strategy, determines the best way to leave a business, whether that’s by sale, passing it onto other family members, introducing new management, or simply reducing your role in the business.
Succession planning should start early in the life of a business. You should consider the most appropriate business structure to use and an appropriate business name that can be sold with the business. Keep in mind the repercussions of using your personal name as the business name.
If the business is owned by more than one person, agreements should be put in place. Set out the process and valuation method in the event that one owner wants to sell, when the other doesn’t.
It could also be important to consider insurance to fund a buy-out by one of the owners in the event of death or incapacity of the other.
As the business grows, consider:
- ensuring it is professionally run and doesn’t rely on just one, or only a few, key people
- the value of the business
- the taxation obligations on a transfer of ownership including capital gains tax and transfer duty
- your obligations to employees.
It’s estimated that around 70 per cent of all businesses in Australia are family-owned businesses, with the wealth of the sector estimated at $4.3 trillion.
According to Family Business Australia (FBA), two-thirds of current family CEOs are aged 50 years or over, and nearly 20 per cent are 65 years and older. 81 per cent of owners intend to retire in the next 10 years but only 33 per cent consider themselves exit- or succession-ready.
In the past, family members often joined the business, but this is less common today.
When a succession plan includes passing the business onto family members, it’s a good idea to evaluate whether formal managerial or other training is required. When inducting your children, having them spend time working in different areas of the business is beneficial, including a trial at the helm while you’re on holidays, or away from the business.
If the plan is to sell the business, it may pay to look internally for a buyer. An employee, supplier or even a competitor could be interested in purchasing the business.
Generally, buyers are looking for a healthy financial background and strong forecasts, along with an ability to operate the business with clearly documented processes that do not rely on the previous owner’s expertise.
Closing or selling a business that has employees carries obligations to pay entitlements including accrued annual or long-service leave. It’s necessary to notify staff about termination of their employment or changes in their employment arrangements with notice periods and/or payment in lieu determined by the age of the employee and the nature of their employment.
The time of selling is very important. If the business is located in leased commercial premises, it will be necessary to consider the obligations of the lease. Vacating premises before the term of the lease expires can be costly if it involves breaking a lease contract. Ideally, the lease should be current at the time of sale, and assigned to the new business owner.
The implications of any capital gains tax, and what to do with the proceeds, (for example making additional superannuation contributions) are also considerations that need to be explored prior to the decision to sell.
At the Small Business Development Corporation we provide free, confidential advice and guidance on succession planning, preparing to sell your business and all aspects of running a business.
To speak directly with one of our experienced business advisers call 133 140 or visit the SBDC at Level 2, 140 William Street, Perth.