Business Succession series – 1. Plans and why they are important
Whether you are a new start up or a well-established business, getting your business succession plan together could alleviate some serious future issues. Regardless of whether the proprietors of your business are your best mates, family or strangers, read below to understand more about the importance of business succession plans.
Do you know what your business succession plan is?
What Is A Business Succession Plan?
Any businesses with multiple owners whether in a partnership, company or unit trust should have a succession plan to take into account life’s vagrancies such as death, total and permanent disability, retirement, sale of interest and expulsion from the business.
Many businesses fail to have a “full and frank discussion” during their “courtship” and usually think that the “honeymoon period” will last forever. But like so many relationships, businesses also end up in “divorce”.
Without a properly structured succession plan including appropriate business proprietors agreements which are tailored to suit your particular business, you could spend much time, money and angst sorting out their “divorce”, which may not be satisfactory or, as in many cases, put undue pressure on you business so that it ultimately fails leaving both the departing and continuing business owners with a disastrous result.
Things for you to consider in making a business succession plan are as follows:
a) Do you need to work in a business to retain your ownership?
or can they be a silent investor?
Issues:
- Control
- Remuneration
- Mentoring a successor to manage the business
b) What are the trigger events?
(i) Death
- Death of a proprietor
(ii) Total and Permanent Disability
- Total and permanent disability of a proprietor
- Diagnosis of a major disease or condition identified as a trauma event affecting a proprietor
- The confirmed mental illness of a proprietor
(iii) Retirement
- Voluntary retirement of a proprietor
- Resignation of a proprietor
- Proprietor attaining a certain age
(iv) Sale of Interest
- Expiry of a predetermined period of time agreed by all proprietors
- The resolution of a specific majority of proprietors to offer the business for sale to an identified purchaser.
(v) Expulsion from the business
- Failure of a proprietor to attend to the affairs of the business for a defined period – gone absent without leave
- Failure of a proprietor to satisfy any predetermined performance criteria
- Insolvency of proprietor
- The unremedied default of a proprietor pursuant to the term of the Agreement
c) What Different Options Do You Want To Adopt
- A right of first refusal;
- A right of last refusal;
- Put and call option or sale to an open marketplace;
- or sale of the whole business?
d) How will you finance the payments?
- By Insurance if death, or total and permanent disability, trauma;
- By vendor terms;
- By external borrowings;
- By introduction of a new business owner?
Conclusion
All businesses or real estate property investments with multiple owners should have these discussions during the “courtship” and a succession plan be put into place with appropriate proprietors agreements. This may take some time to develop in conjunction with their accounting, legal, financial and other business advisors.
Once developed it should be reviewed annually in order to provide certainty for the business owner.
Moreover, lenders will require evidence that such agreements exist and are reviewed to give the lender further comfort that your clients know how to run their business.
If you would like to discuss further, please contact Adrian Riccioni or our Commercial Team on (03) 9739 7377
Written by RNG Lawyers Partner and commercial lawyer, Adrian Riccioni