Planning to exit a business can be just as important as planning for its start-up
A business succession plan may be used to deal with the premature disruption of an enterprise, such as the unexpected illness of a partner, or in circumstances where an owner retires, or a family business passes to the next generation.
Whether exiting a business voluntarily or due to unforeseen circumstances, a good business succession plan will deal with uncertainties, minimise disruption to retain value in the enterprise, address taxation and duty issues and foster a smooth transition from one member to the next.
Succession plans generally involve proactively mitigating risk and protecting assets through strategies such as:
- appropriate business structuring;
- having adequate insurances;
- having a shareholder or partnership agreement in place;
- dealing with conflicts;
- ensuring a business owner’s personal estate plan complements the business structure and succession plan.
Choosing the most appropriate legal structure through which an enterprise conducts its activities can help minimise liability and protect personal assets.
The incorporation of a company essentially separates the wealth and assets of its directors and shareholders from the associated risks of the company. The company is a separate entity and can enter into contracts, sue and be sued in its own right. Consequently, directors are not usually personally liable for company losses, provided they do not breach their fiduciary and statutory duties.
Shares between owners can also be transferred (quite often with no stamp duty arising) without upsetting the external structure of the company, providing continuity of trading despite a change in shareholdings.
Companies are taxed in their own right. Access to the corporate tax rate can be of advantage particularly where profits are retained to pay debt.
Trusts are generally not taxed in their own right may provide for flexibility in the distribution of property and income and achieve favourable tax outcomes. Holding personal assets in trust can also protect against claims by third parties.
Insuring against the risks associated with commercial activities is an important consideration in any business.
Business assets and property can be insured for replacement or other agreed value if they are destroyed or lost.
Public liability insurance and professional negligence insurance protects the business and its members for losses sustained by third parties.
Personal insurances such as income protection provides security in the event of illness and accident.
Buy-sell insurance can provide funding on the loss of a through death, disablement or trauma. The payment enables the continuing owners to acquire that partner’s share using insurance proceeds, without which the continuing partners may be unable to fund a buy-out end up in dispute with the exiting partner or their representatives..
Shareholder and partnership agreements
Shareholder and partnership agreements are essential for managing the relationship between the respective members / partners of a company or partnership.
These agreements constitute contracts between shareholders or partners, and set out the rights, obligations and liabilities between the parties and the management policies of the business and provisions to deal with a range of contingencies that could threaten the ongoing operations of the business if left unresolved.
Agreements should also include provisions to deal with deadlocks and disputes and the transfer of business interests, pre-emptive rights, drag-along, tag-along rights, mandatory sale events, share valuation methods and non-compete clauses.
Good business succession planning requires a comprehensive approach, considering the nature and structure of the business, the personal circumstances and ages of its members, the capabilities the partners, funding, staffing and taxation issues.