Succession Planning As A Business Owner And Why It’s Important
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As a business owner or director, succession planning is a critical aspect of leading the business. There are a number of reasons why it is important to consider the succession plan well before you intend to step down and/or hand over the reins to someone else, be that a family member, promising mentee or a third-party buyer of the business. Here’s why succession planning as a business owner or director is so crucial and how to navigate this essential process.
Why is succession planning important?
Almost half of Australia’s workforce is employed by small to medium enterprises, which account for the majority of the businesses in the country. Many of these businesses are family-owned or tightly held, which means that their long-term success can be linked directly to the owner’s ability to transition leadership effectively and ensure continuity.
In unforeseen circumstances such as the disablement or passing of a business owner or director, a solid and well-thought-out succession plan ensures the uninterrupted continuation of a business and means that the business can carry on its operations smoothly.
When a clear succession plan is in place, an organisation’s employee morale and retention can be boosted. For high-performing employees, it provides a sense of purpose and security because they will be able to see a clear path for their professional development and career advancement within the organisation. This has flow-on effects and can assist in reducing turnover and the costs associated with hiring and training new staff.
When a family-owned or tightly-held business has been that way for many years, the owner or director usually possesses a wealth of industry-specific knowledge and expertise. Without an effective succession plan in place, this knowledge and expertise can be lost, causing a detrimental impact to the business. By identifying and preparing successors, businesses can successfully transfer knowledge and experience to the next generation of leadership.
Legal and financial considerations
Succession planning is not only important for ensuring the right leader is chosen but also crucial from a legal and financial perspective. Without a proper plan in place, the transition of ownership can become complicated and give rise to disputes or legal issues. Additionally, where no clear plan for wealth transfer exists, there may be tax implications that have not been considered. A well-structured succession plan will take into consideration the legal and financial aspects of business ownership transition to help minimise the risk of future problems.
What steps should a business owner take when succession planning?
Identify potential successors
First, potential successors within the organisation should be identified. This could be family members, key employees, or external candidates, so long as their skills, experience, and alignment with the organisation’s values and vision are the correct fit.
Develop a plan
After potential successors have been identified, a plan should be developed to identify your options to implement a change in control of your business. Your options will be dictated by your existing business structure. There are a range of options to consider in terms of how arrangements are documented and whether those arrangements are to be implemented in the immediate term or simply documented in the immediate term, but not effective until your death or incapacity. You should obtain accounting advice at this time to consider the tax effectiveness of the options available to you.
Create a timeline
Succession planning should include a clear timeline, which aligns with the business owner’s or director’s intended retirement or exit strategy. When a timeline is implemented, it ensures that everyone involved is aware of the transition schedule and can plan accordingly.
Regularly review your plan and update it where necessary
If you create your succession plan well in advance of the transfer occurring it will need to be reviewed and updated regularly as your circumstances change. This should not be a burdensome task and does not mean the whole plan needs to be recreated from scratch, it should simply be updated at relevant sections when there are changes in the business environment, family dynamics, or if the availability of suitable successors and the existing plan is impacted.
Seek professional guidance
Succession planning is paramount for business owners and directors and if you intend to transfer your business at some stage, it is prudent to engage legal and accounting advisors who have expertise in succession planning.
If you need assistance creating a succession plan, our business succession planning lawyers in Cairns can help you successfully navigate this crucial process.