What is succession planning?
To put it simply, succession planning is a task given to current business owners requiring the identification and development of new leaders that will replace the current owner when they retire, pass away or step down.
Not having a succession plan means that a business could be setting itself up for disaster. Succession is about ensuring the ongoing success of the company through a timed transfer of ownership and control and should define precisely who, when and how a person will take over a business.
For many business owners, the idea of handing over the reigns can be uncomfortable to think about, which is why business owners should consider a viable succession plan well in advance of actually leaving the business.
Who will take over?
The first thing to do is to identify any likely successor/s. This will usually be done through:
- A family succession plan ie. setting up a trust or gifting/selling the business to a family member
- A non-family succession, which involves selling the business to an employee or another party, also known as a management
What needs to be included?
Generally, a succession plan will address financial, legal and operational strategies for the current owner's exit from the business. Though the details will vary from business to business there are a few key questions to answer:
- Operational issues - When does the current owner plan to leave the business? What are the successors responsibilities? What are the risks involved? Are plant and equipment in good order?
- Financial issues - What is the market value of the business? What are the financial and tax implications of succession? Is the business being sold or gifted?
- Legal structure issues - Will there be a change in legal structure when the current owner leaves? Is a legal document available to dictate the terms of succession? Is there a requirement to change or transfer registrations, licenses or permits?
Implementing the plan
Once a business owner has decided the need to enact a succession plan, they must be able to set milestones and an attainable timeline, which ideally should include:
- The name of who the successor/s will be
- Key dates for financial and legal requirements to be fulfilled
- Training (if required for the successor)
- Transfer of responsibilities
Having a clear timeline that is communicated to all parties will significantly reduce the stress and emotional pressure associated with a business handover. This is why seeking legal advice as soon as possible to consider the options is always the best first move and due to the document being legally binding it is in the owner and businesses best interest to assign a lawyer to best draft the agreement and ensure proper execution. Keep in mind that the agreement should also be updated to reflect changes in business valuation and life insurance coverage to reflect value fluctuations to the company.
If you need legal advice on how to create a business succession plan, get in touch with one of our lawyers today.
Cairns Wills and Estates is a division of Preston Law, Cairns' largest law firm.