The most common methods for business succession are passing the business on to family, selling to employees or selling to a third party.
Business succession can be a daunting proposition. Having worked so hard and for so long to build a successful business, key exit considerations will help you transition from your business smoothly, in accordance with your wishes and in a manner that will set you up financially for the rest of your life.
The most common methods for business succession are passing the business on to family, selling to employees or selling to a third party. While your exit choice will depend on your individual circumstances, a number of critical considerations apply to all of them. Here are our SEVEN critical considerations for a smooth and cost-effective business succession.
1. Start early
The process of business succession is complex. Depending on your exit route, you’ll need to sort through matters relating to finance, premises, suppliers, customers and referrers before you can successfully transfer control of your business to someone else. Business succession should be considered as far in advance of actually exiting your business as possible, simply because careful planning requires time to achieve the best outcomes.
2. Prepare the business for external sale
Regardless of your chosen exit path, best practice will always be to prepare the business as though you are selling it to a third party that has no prior knowledge of the business. This means undertaking a valuation; cleaning up and properly documenting any legacy issues that only you are aware of; ensuring that all systems and key agreements are written down and easy to understand; and presenting accounts in a form that are readily understood by third-party accountants. Your aim should be to ensure that whoever takes over the business – family member, employee or third-party buyer – should be well placed to continue the operation smoothly.
3. Consider the structure of the sale
The business structure and whether you transfer the business itself or ownership of the entire underlying structure (such as shares in the Company or control of a relevant trust) will have different – and very significant – risk implications for both you and the transferee. Given the number of potential permutations and combinations, the most appropriate structure for your sale will not always be clear. You will need proper financial planning, accounting and legal advice to ensure that you adopt the best possible structure for your situation.
4. Consider alternative funding structures
If you aim to transfer the business to family members or employees, they may not have the funds readily available to make the purchase or be in a position to obtain bank finance for the full purchase price. Even with third-party buyers, you may be able to achieve a superior result by providing additional vendor finance or structuring the purchase over time. A wide range of funding options is available including secured vendor finance; issue of different classes of shares; staged buyouts; and more. Where significant risk is involved, it is critical that your arrangement is correctly documented by a legal expert. You will also need professional advice to decide whether a simple sale for cash or an alternative funding structure can deliver a superior result for you or fit better within your plans.
5. There’s more to selling a business than purchase price
It’s common for a business owner who’s selling their business to become distracted by an attractive initial purchase price. They can fail to properly consider related and critical issues including warranty risk, earn-outs, retentions and restraints of trade. In many instances, a seller may be better off taking a slightly lower price but with drastically reduced warranty risk and little or no earn-out requirements. Effectively, it may be better to take a ‘bird in the hand’ instead of chasing ‘two in the bush’. Agreeing to a high initial purchase price with an earn-out figure that would require the business to have a good year or even outperform its own historical best years could be a disastrous outcome.
6. Document the deal properly
Even if you are transferring the business to people you know and trust and who know and trust you, it’s important to properly document the transaction in its entirety and then undertake the transaction in accordance with those documents. When handled by a legal professional, this process provides clarity and protection for all parties, both during the negotiation and drafting the transaction documentation stages.
7. Work with a specialised team of advisors
Well-performed business succession requires a holistic approach and due consideration of all the relevant issues: financial planning, accounting and business advice, and legal services. This is why we advocate working with a team of advisors who are experienced and accustomed to collaborative advice that’s focused on your best interests. There are significant benefits to be gained from working with your professional team to properly understand your current legal circumstances, tax position and financial and life goals. The most appropriate strategy may then be developed and implemented to achieve a smooth and cost-effective business succession process.
To find out more about how to achieve smooth and cost-effective business succession for your business, and to learn about our collaborative approach to achieving the best possible outcomes, please contact Ian Hillhouse or Craig Hong on 07 3228 6120 or email [email protected]lhouse.com.au.
The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.