28/10/2009

Apparently the average age of family business owners in Australia is over 55 and two-thirds of those businesses will change hands over the next 10 years.  Succession planning is a very important way to ensure the efficient transfer of these businesses at the best price possible.

 

Put simply succession planning is about adopting a strategic, managed approach to the way a person exits their business.

 

Here are six rules that apply when thinking about succession planning.

 

First - start early – the earlier the better.  In fact, start the day the business opens its doors. Well if not then 5-10 years before exit. The earlier the planning starts the longer the time for implementation and potentially the better the outcome.  You wouldn’t auction your house after only a two day selling period, would you?

 

Second - as with everything in business, plan, plan, plan.  Think through the issues, seek out specialist advice, understand the concepts and the alternatives and come up with a written plan that steps out the required action and time frame.  An ad in the classifieds saying “financial advisory business for sale” may well result in a sale. But was it on the best possible terms you could have received?

 

Third - build the underlying value of your business. This takes time and is nowhere near as easy for advisory businesses as it is for businesses that have more tangible products to sell.  But ‘hard’ doesn’t mean ‘impossible’.  With thought and advice the method will come.

 

Fourth - choose your successor carefully.  The right successor maximises the price and the wrong successor doesn’t.  Interesting enough you can graph the increase in sale price of the business against the level of complexity and effort you take in selling it.  Generally the more effort - the higher the price.

 

So as you move from the easiest sales (to family or friends, to your existing database of contacts or to other shareholders) to the harder ones (employees, trade sales and private equity) the likely price mounts.  By taking the time to work out how to become attractive to that latter group the business owner is putting a higher price on their business and demanding a better outcome for themselves.

 

Selling to key staff can be a particularly beneficial process, especially if it is given enough time to implement.  Traditionally succession planners have used employee benefits trusts (EBTs) to try to grow the capacity of the employees to afford a large buy out through salary sacrifice arrangements and or investment growth options. EBTs have the added benefit of allowing staff to see themselves benefitting from the operation of the business from Day 1, with the flow-on effect of better staff performance.

 

The tax office doesn’t make it easy though.  EBTs are a tax minefield and shouldn’t be used until clear tax advice has been obtained for all participants. Other ways of funding key staff might therefore be necessary.  But if enough time is allowed there will be more chance to find better alternatives.

 

Fifth - allow plenty of time for the transition to occur (as opposed to the actual planning which also needs plenty of time).  By allowing that time the exiting owner assures themselves of the best price and the successor gets what they want too – a viable healthy business.

 

Sixth - and finally, understand the tax issues that will impact the exiting owner.  Again, the earlier those issues are considered the better able that owner and their advisers will be to minimise tax and benefit more effectively from their exit.

 

* Peter acknowledges as the main reference for this article, Craig West of SuccessionPlus.  

If you require further information surrounding Succession Planning, please contact Peter Townsend at Townsends Business & Corporate Lawyers (02) 8296 6222.