Let’s face it, succession planning can be daunting and is often one of those topics that can easily be put on the shelf to ‘deal with later’. However it is crucial that there is a clear and concise plan as to what happens in unanticipated situations if you are a partner or shareholder in a business.
What if something happened to you or one of your partners? If you died, would your business partner be able to pay out your family or estate for your share of the business? Would you and your business be able to survive financially if you suddenly lost one of your business partners? These may seem like difficult questions; the reality is that although most business owners recognise the importance of having a succession plan, too many fail to take the required steps to actually implement one.
Let’s talk statistics. Did you know that in a business with two partners there is a 52% chance that one partner will either die or become totally disabled before the age of 65. If there are three partners in the business, these odds rise to 67%, and for four partners, 77%.
A clear and concise business succession plan that is unique to your practice or firm can put you back in control of your business equity to ensure you can confidently protect your business, your partners and your family’s future.
So what does a succession plan actually do? Through careful design and implementation, a good succession plan will:
- Deal with circumstances where a partner leaves the business for any reason such as retirement, death or disability;
- Provide funds to enable surviving business partner/s to buy out the financial interest of the deceased business owner;
- Provide funds so that partners/s can buy out the financial interest of an owner who is unable to work due to illness or injury;
- Replace lost business income;
- Obtain release from personal guarantees;
- Maintain credit standing of the business; and
- Keep the business viable until an appropriate buyer can be found if required.
In order to achieve a complete business succession solution, there are three essential elements that must be present. These components are vital to ensure you and your business are fully equipped to cope with whatever the future may have in store for you.
- A binding legal agreement that suits all individuals involved and that takes into consideration all taxation consequences is the foundation of a complete succession plan. This agreement is a vital component to securing peace-of-mind for you, your business partners and your family.
- Together with an accountant and partners of your business, an ‘Agreed Valuation Formula’ is also established. This provides the basis for calculating the future value of the business and is included in the legal agreement underpinning the financing of any change of ownership.
- Appropriate funding solutions must also be arranged to ensure smooth transition of ownership of your business.
These elements, when executed well, can alleviate any unnecessary conflict and the associated stress if the unexpected was to occur.
For some this will sound familiar. For most, however, this will be uncharted territory. If you haven’t got a fully agreed written and up to date succession plan with your business partners in place, the steps to achieve one are really quite straightforward.
An initial appointment is set up with your dedicated succession advisers and solicitor where all relevant personal and business information is collated. Once the gathered data is analysed, relevant options and strategies are presented to you and your partners for consideration. The Business Succession Trust agreement is then finalised and signed, and the relevant funding solutions are put in place. That’s it.
The importance of a well structured, complete business succession plan cannot be stressed enough, especially if you are involved in a practice with multiple partners. Without an agreed strategy as to what to do in the event of a partner suffering illness, disability or even death, all involved leave themselves in a vulnerable and precarious situation.
For further information or to arrange an obligation-free appointment to discuss business succession for your practice, please contact MGD Wealth on (07) 3391 5055 or email firstname.lastname@example.org.
 Zurich Mortality and Morbidity Calculator 2004
Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied do not take into account your personal circumstances or requirements. If should not be relied upon as a substitute for professional advice.