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Family business succession planning

Operating a business presents numerous challenges, whether this be at the inception of the business, during its regular lifecycle, or upon winding down or ownership transition. One of the many important considerations for a business owner is planning for the long-term future of the business and, in particular, ensuring that control of the business passes according to their wishes when they retire or upon their death. Many small business owners, however, do not have a well-documented business succession plan. To this end, it is vital that business owners consider and put in place appropriate arrangements for the future succession and control of their business.

Business succession planning is particularly crucial for:

  • ensuring the continuity of the business;
  • ensuring control of the business is transferred with minimal disruption;
  • providing security and certainty to family and stakeholders of the business;
  • avoiding disharmony amongst owners;
  • maximising the value of the business;
  • protecting assets from creditors; and
  • minimising the adverse tax consequences associated with business succession.

There are many ways to facilitate business succession. These include but are not limited to:

  • Transferring control of the business to family;
  • Transferring ownership to other stakeholders of the business;
  • Selling the business to a third party;
  • Restructuring the business; and
  • Realising the value of the assets of the business through a winding-up.

The suitability of the various options, however, will involve consideration of factors such as:

  • the business structure;
  • the value of the business assets; and
  • the requirements or wishes of the business owner/s as well as their family and associates.

Following an evaluation of the options, different actions will need to be undertaken. For example, this may include, where relevant:

  • Undertaking a valuation of the business and its assets;
  • Taking out a life and disablement insurance policy over the directors/co-owners of the business. This is to ensure that co-owners of the business have the means to fund the purchase of an interest of a co-owner who departs due to an involuntary event such as death or disablement;
  • Drafting or reviewing and updating Shareholder/Unitholder/Partnership Agreement(s) to establish, amongst other matters, rules regarding the management/operation of the business and accommodate changes in control/ownership;
  • Reviewing and updating the Company Constitution, and holding appropriate meetings of directors or shareholders to confirm any decisions made;
  • Drafting of a Buy and Sell Agreement, being an agreement which allows for the buy-out of a co-owner’s interest in certain specified circumstances;
  • The identification of suitable successors and their integration into the business;
  • Drawing up a family charter/agreement to outline strategies and establish expectations regarding the family’s interaction with the business and to specify how decisions about the family business are to be made;
  • Drafting of employment agreements to set out expectations, roles and obligations of the successors to the business;
  • Drafting of a sale of business or sale of shares/units agreement in the case of sale to a third party;
  • Reviewing and/or updating trust deeds, depending on the asset holding structure of the business, to ensure the ultimate controllers and successors are as required by the owners;
  • Drafting of Wills and Powers of Attorney for the owners to ensure that business assets held personally by the owner (if any) will be distributed as required upon the death of an owner; and
  • Review of Self-Managed Superannuation Fund (SMSF) arrangements and documents relating to the business owners; and
  • Devising an effective tax planning strategy. Family business succession arrangements can trigger stamp duty, CGT and, in some cases, GST liabilities. Commercial and private objectives must be weighed against such tax considerations when planning for the future control and succession of the business.

Succession planning takes time, and if you don’t consider and document arrangements and strategies for the future succession of your business, it may impact on the viability of your business and its potential future success.

If you would like further information, see our earlier article on Business Succession Planning for Blended Families and don’t hesitate to contact Anthony PointonFelicity Cara-Carson or Jonathan Slade of our office on (03) 9614 7707 with any queries.

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Pointon Partners is based in Melbourne, Australia, and is a leading provider of legal services to businesses and their stakeholders. We are specifically known for our expertise in the following areas: Commercial Law I Property I Litigation I Taxation I Corporate Law I Intellectual Property I Employment Law I Information Technology I Personal Level 14, 565 Bourke Street, Melbourne, Victoria 3000 | P: +61 3 9614 7707 | F: +61 3 9614 6676 | E: general@pointonpartners.com.au |W: http://pointonpartners.com.au/