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When you spend time and money creating the business of your dreams, do you stop to think about what will happen when you no longer want to, or no longer can, continue to operate the business?

For many people their business is one of their most valuable assets, usually along with the family home and superannuation.

Having spent so much time and effort in building up a business, no doubt you wouldn’t want to be among the 80% of business owners who receive no value for their business when they leave it.

One of the best ways to ensure that you have an asset worth something when you no longer wish to participate in your business is to have a properly drafted and implemented business succession plan.

So, you might ask, what exactly is a business succession plan?  It is a documented strategy to determine the best way for you to exist your business while ensuring the continuity of the business.

There are two main options to consider when developing a successful business succession plan:

  1. Retention planning – keeping the business in the family – do you want the business to pass to family members? If so, you will need to consider both the legal obligations and the impact upon family relations.
  2. Buy-sell planning – selling the business to external parties, such as employees or a third party.

A successful business succession plan will include plans for unforeseen circumstances such as the illness or death of a business owner, or another event that may lead to the owner’s unexpected exit from the business.

Some important non-legal issues to consider when making a successful business succession plan include the following:

  1. What is the value of the business?
  2. How can you maximise the value of the business?
  3. Does your business have well developed policies, procedures and plans?
  4. There may be staffing considerations – such as retraining or certification; properly documented job description forms, records of accrued leave and long service leave entitlements as well as transitioning the staff to the new owner or owners.
  5. It is essential to ensure that you have accurate financial and tax records for a number of years, and that issues such as:
    • payroll
    • BAS payments
    • outstanding debtors
    • contractual arrangements with creditors
    • CGT considerations

    are all dealt with appropriately.

     

It is best practice to get professional advice from your accountant, a business coach or external manager, a financial planner and a HR professional to ensure that all of these matters are properly documented and strategized.

There are also a number of legal issues that you should give consideration to, including, but not limited to the following:

  1. The structure of your business – is it structured as a sole trader; a partnership; a company; a unit trust; a joint venture; or a blend of these structures?
  2. The owner’s ongoing involvement during the transition phase. There can be many reasons why it may be more preferable for an outgoing owner to retain some ongoing involvement in the business for a period of time during which the new owners are taking over.This will often allow clients and staff to familiarise themselves with the new owners, as well as allowing new owners to ‘learn the ropes’ and settle in.This involvement might take the form of:
    • a consultancy
    • employment
    • joint ownership (and/or profit sharing) for a period.In these instances, it is important that these arrangements are properly documented for peace of mind, and in the case of uncertainty or a dispute.
  3. The premises of the business, depending on the type of business, may be very important to the business. It may therefore be very important for the incoming owner to secure a good tenure of lease.
  4. There are a number of different contractual considerations that may arise, and should be properly vetted by your lawyer, such as:
    • director’s guarantees
    • supply contracts
    • employment contracts
    • terms and conditions of trade
    • independent contractor arrangements
  5. Intellectual property considerations will vary in importance for different businesses. Generally the more legal protection that a business’ IP has, the more valuable it will be.  This will include some of the following for many businesses:
    • patents
    • trademarks
    • copyright
    • confidentiality arrangements
    • protection of trade secrets
  6. It is extremely important to identify early in the business succession planning process which documents you might need in place.  From a legal perspective, these documents might include:
    • Wills for the current and incoming owners
    • Enduring Powers of Attorney for the current and incoming owners
    • A buy/sell agreement
    • A shareholders agreement
    • Leasing or sub-leasing documents
    • A sale of business agreement
    • Employment contracts
    • ASIC documents for the transfer of shares and directorships
    • Partnership agreements
    • Terms and conditions of trade
    • IP protections

     

 

CONCLUSION

There is no need for you to be one of the 80% of Australian business owners who receive no value for their business when they are no longer involved in it!

Call Lynn & Brown Lawyers today and make an appointment with one of our commercial lawyers to start your successful business succession plan today.

 

 

About the author:

This article has been authored by Jacqueline Brown who is a Perth lawyer and director at Lynn & Brown Lawyers.  Jacqui has over 20 years’ experience in legal practice and practices in family law, mediation and estate planning.  Jacqui is also a Nationally Accredited Mediator and a Notary Public.

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