Business Succession Planning Lawyers & Solicitors
What is business succession planning?
Business succession planning is the process of looking at your operations and setting your business up for transition to a new owner at some point in the future. That new owner may be a family member/s, another employee, a competitor or someone seeking to expand to your area.
The actual process of business succession planning varies between businesses but usually involves seeking advice from your accountant and lawyer and consulting with the potential new business owner about how a transition might look.
Why is business succession planning important?
Most business owners are quite proud of the business they own. Stories of sacrifice, commitment and dedication to the operation that they manage and own are quite common among business owners. The stories are unique and special – speaking of devotion and a reflection of a large aspect of a person’s life and even their identity.
Certainly, many business owners have a large amount of cash tied up in their business. For some people, the value of their business represents their retirement savings. For others, it represents an asset. For others again, it represents a legacy for the family to be passed down from generation to generation.
Many business owners fail to properly plan their business succession. They are quite happy to “have a yarn” with their dubbed successor and talk about the day when they might be ready to retire. However, this can be a dangerous option. Many business owners come unstuck with their succession plans when their successor leaves the business, doesn’t have the ability to buy the business or simply starts their own business (and competes with their former boss).
A formal business plan considers legal methods to introduce new business owners to your business and slowly transition them into your business. This gives you some assurance that they will stay around to complete the transfer and gives them some assurance that they will one day own the business outright.
What are some examples of successful business succession planning?
Financial planning business
- Max, Jack and Ted own a 1/3 share of the business each. They are aged 45, 55 and 61 respectively. They each write about $400,000 commission each year.
- Sam has worked in the business for 5 years. Same is 30. The customers like him and he performs well. He writes about $350,000 commission each year.
- Ted wants to get out of the business soon.
- Max and Jack offer to buy his shares in the business. Ted accepts.
- Max and Jack hire another financial planner.
- Max and Jack decide that Sam would be a good fit for the business. They offer him 10% shares in the business.
- Sam accepts and becomes an owner of the business.
- Sam now has a vested interest in the business. He cannot easily leave but now he earns more from the business as well. A win win.
Mining services business
- Jack owns the business outright. He is aged 60.
- The business is very valuable with a strong balance sheet and a very big asset list.
- Jack wants to sell the business but none of his employees can afford to buy it outright.
- Jack transfers half of the ownership of the business to his Sid, Trevor and Paul (three of his employees). Jack retains the other half.
- Jack takes securities over the half owned by the employees.
- A set of agreements are signed which provide:
- Jack will work in the business for one more year, transitioning customers to Sid, Trevor and Paul.
- Jack will receive dividends as a shareholder.
- In ten years, Trevor, Paul and Sid will refinance and purchase the other half of the business from Jack. If this is not possible, alternatives are present in the agreement.
- A gradual transitioning of operative and management control from Jack to Trevor, Paul and Sid.
- This structure, though complicated, allows the transition of the business and continued operation of Jack’s legacy.
What are some examples of poor business succession planning?
Retail store example
- Michelle and Greg valued their business at $1,000,000 based on an accountants appraisal.
- They operated the business well into their 70’s.
- One day, Michelle and Greg decided that they were at a stage of their life where they couldn’t keep the pace they knew they needed to keep. They also realised that they probably should have started stepping back about ten years ago.
- They looked around and realised that none of their employees or children wanted to work the business.
- They then approached a number of their competitors.
- Only one of their competitors offered to buy their business for the sum of $100,000.00.
- Michelle and Greg looked at their stockholding which was sitting at $200,000.00
- They knew that about $50,000 of it was old stock and the rest had to be sold (they couldn’t return it).
- Knowing that it would be difficult to sell their entire stockholding without being forced to buy other stock items, they decided to accept the competitors offer.
- Michelle and Greg had run out of time to devise, set up and implement any sort of prospective business plan.
Equipment Hire Business
- Kelly and Ben own a multi-million dollar equipment hire business. They were each about 50 years old. The business was valued at about $20 million.
- Ken was their trust operations manager. He was well respected in the industry and many of the good commercial customers referred to and dealt with him personally.
- Ken presented Kelly and Ben with a proposal to buy some of their shares in the business.
- Kelly and Ben refused. They were making very good money and didnt want to part with it.
- Ken decided to leave the business and start his own equipment hire business. He had struck a deal with a bank, financed his house and other assets and he thought he could be moderately successful.
- Fast forward five years.
- Ken has had really good success in the industry. His business is worth about $10 million.
- Kelly and Ben struggled for some time after Ken left, first to replace him but then also to stave off the losses from the number of customers he was taking.
- Kelly and Ben’s business had dropped in value to $15 million.
- Ultimately, Kelly and Ben decided to purchase Ken’s business.
- Ken decided to sell for $11 million. He worked with them for one more year and then retired.
When should you consider doing some business succession planning?
If you are thinking about retiring or you think you have a business that you would like to one day sell or transfer to the next generation, establishing a succession plan should be a priority.
In our experience, business owners that do not properly plan their future succession are more likely to not be paid what their business is truly worth or are more likely not to receive anything at all.
Isn’t a gradual transition a loss of control?
There are many business succession plan methods that you can follow. Gradually transitioning control to a new owner is not the only way to carry out a business succession plan. However, it is usually quite an effective plan. Many small/medium businesses usually rely on the leadership/reputation of a few people – usually the owner.
Many customers are usually loyal to the experience that they receive and if the experience changes (for the worse), they may be tempted to go elsewhere. Gradually transitioning a new owner in can help them “get a feel” for how and why the business is operated the way that it is – which can help set them up for success down the track.
How do you get started with business succession planning?
The best way to start a conversation around your business succession planning is to contact one of our business lawyers and seek their advice. You won’t need to bring anything to the first appointment. Any documents which need to be reviewed during your succession planning, can be collected after your first appointment. The only thing you need to know is what you already know best – your business.
To start a conversation with one of our commercial business lawyers:
- call 07 4931 1888
- email firstname.lastname@example.org
- or visit us at 74 Victoria Parade, Rockhampton, QLD