Business succession often occurs in an orderly fashion due to people retiring or moving on to other ventures. Sometimes, however, the transition can be unplanned, rapid and more costly where a proprietor suffers financial hardship, illness, death or divorce.
Where a business is sold or transferred in a ‘fire-sale’ situation, without the benefit of the owner also transferring his or her knowledge, the value of the business can be drastically reduced. That’s why it’s essential to know how to do succession planning, even if it’s for a small business, so you can plan ahead. Keep reading to learn more, or you can get in contact with one of our experienced business sale lawyers.
Overview:
- Why is succession planning important?
- Benefits of succession planning
- How to plan for a successful succession
- 8 things to consider in a business succession plan
Why is succession planning important?
Running a business is complicated
A well run business is like a well oiled machine. It is structured and organised, with systems in place to help manage different parts of the business, such as:
- Accounting and financial systems for managing income and expenses, creditors and debtors, payroll and taxation;
- Customer and supplier databases;
- Stock management and product ordering;
- Cleaning and health compliance;
- Certification maintenance;
- Employee training and development; and
- Marketing including website maintenance and social media campaigns.
Most of these systems take many years to develop and are constantly being fine-tuned to accommodate changing market conditions and legislative amendments. Each component in itself is a complex mesh of interweaving factors and stakeholders. That is why it’s so important to know how to do succession planning, in order to factor in all these moving parts. It will save you considerable time and stress in the long term. It’s why we also recommend speaking to a commercial lawyer.
3 benefits of succession planning
Whether the sale of a business is planned or not, planning for succession will have many benefits, which include:
- An easier transition whether that be from vendor to purchaser or from one generation to the next;
- A better transfer of goodwill; and
- Achieving a higher price.
How to do succession planning
Every business succession plan will be different and will vary according to the type of business, the size and complexity of the business and its management structure. A common feature of all effective business succession plans is to start the plan as soon as possible and treat it as an ongoing work in progress.
The plan should seek to systemise as many parts of the business as possible and to document those systems. During the succession planning process, it is advisable to look at the following additional things:
8 things to consider in a business succession plan
- Succession goals and risks;
- Looking at the business to determine its fitness for succession;
- Recognition and management of barriers such as the time necessary to prepare a plan and legislative restrictions;
- Potential heirs and/or purchasers;
- An ownership structure that allows for the introduction of new partners and the transfer of business assets to the next generation or a purchaser;
- The owners putting in place appropriate Wills, Enduring Powers of Attorney and Advance Care Directives and, where appropriate, appointments of Alternate Directors;
- Capital gains tax consequences of a sale or transfer and using superannuation to maximise returns;
- The production of a ‘question and answer’ style document specific to the business to compliment the various documented systems of the business.
Successful business succession is in the planning
The sooner you learn how to do succession planning and the sooner you start, the better. Arguably, you should start planning to leave the business as soon as you start the business.
It takes time to work out what will need to be done and to implement those changes to ensure a successful transfer when the time comes. Often, some of the factors that ensure a successful business will also help with business succession. An effective succession plan will likely make the business more successful and valuable, both before and after transfer.
Have more questions about how to do succession planning for your business or want a lawyer to help you create the best possible strategic plan? Get in contact with the experienced team of commercial lawyers at Beger & Co. Our experienced team of commercial lease lawyers and contract lawyers are also here to answer any questions about commercial leases, contracts and more.
