As a business owner, farmer's wife, and farmer's daughter I understand how difficult it is to separate the business from the person - the years of hard work, financial investment, and emotional commitment make it particularly hard to imagine there being a day where your business and life aren't extricably linked.
Unfortunately many business owners die or become incapacitated without ever getting around to formally addressing the succession of their business.
Just as most entrepreneurs are welded to their business - succession planning is welded to an effective estate plan - the two are extricably linked.
Whether you're building a multi-million dollar enterprise with extended family, a business partner or investors, run a small business to provide yourself an income, or you're busy creating a business legacy for future generations - a succession plan helps to avoid timely, costly, unintended, and often catestrophic effects on your family, employees, and business partners.
Succession Planning Isn't Just For Retirement
Many people tell me they have no plans to retire and therefore they have no need for a succession plan. In reality a succession plan is critical to protect and safeguard your legacy, provides financial security for your fmily and employees, and prepares for a variety of scenarios including retirement, disability, incapacity, and death.
Having a formal succession plan will:
- Ensure that you and your employees are prepared for change
- Provide a 'how to' guide for someone else to run your business
- Ensure a smooth and fast transfer of ownership and control
- Minimise disruption to business operations
Small Business Succession Planning
A common misunderstanding amongst small business owners is that their business holds no value outside the immediate income it provides. Whilst this may be the case, many small businesses provide vital family income, or hold assets that have more value than they realise.
Enterprise level businesses often have agreements and structures in place that protect the business from death or incapacity, but sole traders, sole directors and smaller businesses often lack any formal succession plan - with business owners often making the incorrect assumption that their business can be kept operational by their family or employees after their death.
Things To Consider When Succession Planning
We recommend you seek professional financial and legal advice around how to create the best possible succession plan for your business. It's also important to involve your family in discussions around succession to determine their interest (or disinterest) in running your business in the future - involving us in these conversations can help avoid potential conflicts before they arrise.
As a guide the Office For Small And Family Business suggest the following key considerations when preparing a business succession plan:
Understand the structure of your business
It's important you seek advice from your accountant about how your business is structured. There are several different types of business structure and each has a different way of being dealt with in terms of estate and succession planning. The structure your business operates within will determine how the business and its assets are handled after your death.
Choose a successor
Your estate plan should outline how you wish to transfer your business's legal ownership and operational management if you were to die or become incapacitated - in line with the type of structure your business operates within.
Even if you're passing your business to family, a long-term employee, or a business partner who is familiar with your business a documented succession plan will outlines roles and responsibilities which help to avoid confusion and potential disputes.
Some things to keep in mind when considering a successor include:
- Are you the key person in the business or do you have partners?
- Does your spouse or partner or another family member assist you or have a key role in the business?
- Have any of your children, employees, or third parties shown an interest in the business?
- Is your business operated in way that succession could be addressed during your lifetime?
- If you're passing to more than 1 person will ownership be equal?
- Do you intend to gift or sell your business to your successor?
Value your business
The value of a business lies in the commercial structures, relationships, and assets that are used to generate income. This can include (but is not limited to) your business name, intelectual property, logo, website, goodwill, client database, suppliers, contractors, bank accounts, equipment, licenses etc.
Documenting where the value lies in your business helps your nominated successor and/or executor understand the true value of your business.
iDocument your plan
A good succession plan will ensure whoever takes over your business has everything they need for a smooth transition and can continue operating your business with as few interruptions as possible.
Keep all your important business documents in one place, including any relevant agreements (employer, contractor, and supplier agreements), terms & conditions, policies and procedures as well as information relating to any debts, loans, licenses and registrations. If relevant for your business structure you should include copies of your Company Constitution, Shareholder Agreement or Partnership Agreement.
Nominate your legal representatives
When you work with us to prepare your will we will help you appoint one or more people as executors of your estate - this will ensure you have a legal personal representative who has the authority to immediately manage your business if you were to die.
We will also ensure you have an Enduring Power Of Attorney which nominates who will make decisions about your personal and business affairs if you become unwell or incapacitated.
Regularly Review And Update Your Succession Plan
Your succession plan should include specific information about your business that regularly changes. Taking the time to review and update your plan as your business changes ensures you are ready for any eventuality - and takes care of the people who are tasked with taking care of your business.