A key component of succession planning for business owners that is completely overlooked or not attended to correctly is planning for unexpected events such as the loss of a key person or business owner due to death, injury or illness.
Whilst it is a difficult subject to discuss amongst business partners, a lack of planning for these unexpected events may result in you paying double or triple taxation on your exit from a business, failing to pass your wealth securely and tax efficiently to your family, estate disputes and business failure for the ongoing business owners.
The following are 7 reasons to make sure your business succession plan considers the impact of unexpected events.
7 Reasons to review your business succession plan
It is important to make sure you have a process documented to arrive at a fair value for the business. Your interest in the business is usually deemed to be disposed at market value for tax purposes. If the consideration you receive is less than market value then you may have a taxation liability for money your estate is not going to receive.
The valuation methodology should be reviewed regularly as the business grows to make sure it is still relevant and reflecting its current valuation.
This can be difficult as there is not a readily available market for most small medium enterprises (SMEs) and the valuation is subject to ongoing change. However establishing a market valuation is a crucial step.
You may have unrealistic expectations regarding the value of your business and by having it professionally valued you can then undertake business improvements strategies to grow your business and be in a position to demand what you think it should be worth.
Protection of assets of the deceased
For most small business owners, your business is also your “superannuation” and represents a large portion of your overall family wealth and is being relied upon to fund current lifestyle requirements but also is held with the expectation that it will be sold at some point and the proceeds be used for retirement planning.
A documented business succession plan can provide the families of the business owners that if there is an unexpected event, they can be certain that their lifestyle will not be comprised and that they will be still able to achieve their personal and financial goals.
Protecting the business for the survivors
Many issues could affect on the continuity of your business as a result of an unexpected event. The loss of a key person may have an impact on profitability and revenue, loss of an owner could result in a reduction in security used for finance.
Planning should consider how these obstacles will be overcome for the survivors so that your business continues on without interruption. Issues to be considered include security required for borrowings, cash flow requirements for the outgoing business owners and impact on profitability on the loss of a key person and how they could be replaced.
A legal document is required to document the plan. This document is commonly known as a Buy Sell Agreement and should be prepared by Solicitors who are well versed in taxation and accounting matters. To prepare a Buy Sell Agreement requires input from your solicitor, accountant and financial adviser.
In conjunction with the preparation of a Buy Sell Agreement, a review should be completed simultaneously of your personal estate plan. The proceeds from a disposal of your interest need to be paid to the beneficiaries of your choosing in a tax and asset protective way.
If you there is no plan in place for unexpected events, the options available to fund the outgoing business partner will be limited and subject to debate. Prior planning will consider the following:
- How will the outgoing business partners be paid
- Effect on cash flow of the business
- Cost of finance versus other options
- Security required for finance
- Cost of insurance
- Payment of insurance premiums if required.
There are many tax issues to consider and frequently the clients tax advisers are not part of the discussions and left to make sense of it after the event when it is too late. Lack of awareness of tax issues can result in double taxation and a smaller estate for your family.
There have been several changes in taxation legislation recently which require all business succession plans to be reviewed including the recent federal budget.
Tax issues to consider include:
- Ownership of insurance policies that may be used to fund an agreement;
- Access to small business capital gains tax concessions;
- Impact on estate planning;
- Tax deductibility of insurance premiums; and
- Potential tax liabilities and how these might be minimized
Often one of your trusted advisers may address part of these issues and leave out a critical component which may have a major impact on you being a to achieve your personal and financial goals. Business succession planning requires a collaborative approach with a facilitator who understands your business, personal and financial goals coordinating the process.
For the best results your accountant, solicitor and financial adviser need to be working in sync to maximize the outcomes for you, your business and family.
Business Succession Planning Outcomes
There is an increasing requirement to have up to date business succession plan. Having a plan for the unexpected events is an important component of an overall business succession plan.
Planning for the unexpected will enable you to:
- Build a foundation upon which to grow your business;
- Certainty and peace of mind for ongoing and outgoing business partners;
- Engage in other wealth building activities;
- Provide a platform to commence broader succession planning;
- Review of estate planning; and
- Review and updating of business structures.
Taking the time to update your business succession plan for unexpected events will enable you to achieve your personal and financial goals as well as your business goals.
Follow My Footprints – Geoff
- What is Your Exit Plan? Personal Succession Planning.
- Estate Planning is a Journey – 9 Reasons to Up Date Your Estate Plan.
- 10 Reasons Why Estate Planning is Important
- My “Why” in Life
Disclaimers & Disclosures
Geoff Ivanac is a Sub-Authorised Representative (No. 000309751) of Barsden Private Wealth Pty Ltd ATF The BPW Trust (ABN 41 153 930 799) trading as Barsden Private Wealth. Barsden Private Wealth is a Corporate Authorised Representative No.416315 of BPW Licensee Services Pty Ltd (AFSL 484 198).
The information provided on this website has been provided as general advice only. We have not taken into account any particular person's objectives, financial situation or needs. You should, before acting on this information, consider the appropriateness of this information having regard to your personal objectives, financial situation or needs. We recommend you obtain financial advice specific to your situation before making any financial investment or insurance decision.