When ‘Steve’ (not his real name), a specialist software developer working in the mining and resource sector, turned 50, he reflected on past achievements while looking to the future. Steve and his wife ‘Jane’ (not her real name) had built a company with products in high demand by mining and resources corporations around the world and the business was enjoying much success.

Hillhouse Legal Partners was asked to ensure his assets were protected and the full value of the business was realised upon its sale.

‘We needed representation that would level the playing field when negotiating large contracts or if we ever needed to defend ourselves.’

We discovered that Steve and Jane’s financial security might be compromised in the event of legal claims against their business, which could impact their ‘big picture’ financial outcomes and our goal was to help them understand their exposure to legal action and how to protect themselves, their business and their future.

At that time, Steve had never sought legal advice on any matters relating to contracts, warranty claims, protecting his business and personal assets, or most importantly, protecting the significant intellectual property (IP) he had accumulated relating to his custom software.

Hillhouse Legal Partners helped to guide Steve through a myriad of legal issues that would result in the sale of his business, maintaining his intellectual property to help him achieve his future goals, and implementing an estate plan for the benefit of future generations.

Steve’s clients were mostly large multi-national corporations and the work he delivered for them was complex, involving specialist intellectual property. He was becoming concerned about his legal exposure and realised he needed informed legal representation who could level the playing field, helping him to proactively protect himself and his business when negotiating large contracts or defending his assets, should he ever need to do so.

With our considerable experience working with large and small corporations and expertise in contracts law, estate planning and matters involving intellectual property, we were well aware of Steve and Jane’s legal requirements.

Legal Needs Assessment

Steve and Jane’s financial advisers had identified several risks that could adversely impact Steve and Jane’s livelihood should they become involved in legal action, or if one (or both) of them were to pass away unexpectedly.

Among the most pressing legal matters were reviewing existing contracts and advising on previous trading issues which may have given rise to claims, protecting Steve’s (IP) and ensuring sound structures for business and asset protection.

Steve’s questions during the early stages of our engagement included:

• What would happen if the entity had a creditor claim; would their assets be exposed?
• Could they separate their assets to a different service entity?
• Would it be possible for Steve’s IP to be held in a separate non-operating entity?
• Once the business sold, could he continue to work post-settlement?
• Could he retain some, or all, of his IP without affecting the overall sale value of the business?

While Steve’s immediate requirement was to mitigate risks, his main goal was to sell his business within three years. An unexpected trade offer brought these plans forward and our attention turned to the sales transaction.

Advice Process -Legal

Hillhouse Legal Partners advised and supported Steve and Jane through the sales transaction as well as addressing asset protection matters, warranty claims, reducing warranty amounts, and retentions.

As Steve would continue to work for the purchaser post-settlement, we provided support and advice relating to the terms of his remuneration package, including protecting his  IP once his engagement with the purchaser was complete.

Structures for holding assets and for protecting Steve and Jane from creditors and other legal challenges were decided alongside their accounting advisers. This enabled Steve and Jane to benefit from available tax concessions, which included making distributions to their adult children as part of their financial independence strategy.

Outcomes Achieved

Hillhouse Legal Partners worked in collaboration with financial and tax advisers from the outset and this, coupled with open and informed communication with the purchaser’s representatives, allowed for a successful and smooth sale transactions, quickly clearing any road blocks that could have slowed down negotiations and delayed settlement.

The business sold smoothly within 12 months. Steve continues to work for the purchaser and is enjoying an attractive remuneration package while his IP is protected.

Our advice in relation to warranty claims and retentions led to more cash being available to Steve and Jane sooner.

Steve and Jane’s wills and estate plan means they are now confident that the legacy they have created will be protected and dispersed seamlessly to their beneficiaries upon their passing.

Summary: Top 10 Outcomes

Steve and Jane’s circumstances are common among business owners that have built a business from scratch and then look for liquidity as they get older. 

Often businesses that start small as sole operators or partnerships delivering a particular product or service gain traction as their specialisation develops. For many start-ups and small businesses, the business structure (if one exists) is quickly outgrown, leaving them exposed to a wide range of issues that can negatively impact the business, but more importantly, threaten their personal prosperity.

The key is to seek advice and review your circumstances so that at the very least, you are well informed of your situation and the options available to you.

Engaging a highly qualified and holistic team is crucial. It’s rare that clients have an advice team approach that combines significant knowledge, experience and industry-specific insights of high calibre business, tax and legal advisors for the purpose of achieving their goals.

Top 10 Outcomes achieved for Steve and Jane:

1. The business sold within 12 months. Favourable warranties, indemnities, earn-out and cash position for our clients.
2. Value was extracted with an after-tax outcome of approximately $9.5 million.
3. Significant tax savings included the standard 50% CGT discount PLUS an additional 50% Active Asset CGT discount.
4. The tax rate on all sale proceeds was less than 7%.
5. The purchaser also enjoyed significant tax savings.
6. Financial independence was achieved, which included $1 million from the sale invested in their superannuation with NO CGT payable on the gain for 15 years.
7. Steve was able to continue earning from the new owner on a favourable remuneration package while completing his PhD.
8. Steve’s IP on the custom software he developed is protected.
9. Steve & Jane’s significant personal assets have been protected.
10. Steve & Jane’s family’s future is secured as they have detailed their legacy in a properly executed estate plan.

If this case study has highlighted matters needing attention in your business, we invite you to contact us to request an appointment for a complimentary, no-obligation discussion.

Please call Zac Herps on (07) 3220 1144 or email zac@hillhouse.com.au