Our Succession Planning Series – Part 3: What’s Involved?

This is the third bulletin in our series on succession planning. In this bulletin we look at the ‘what’ of family business succession planning.

Team selected: What now?
So we have embarked on the succession planning process, we have formed our team, what do we do now?

Many business owners – especially those without a succession plan in place – are surprised at how long it can take to transition ownership or control of a business, and exactly what is involved. It can be a process that takes years.  But in our experience, the sooner you start, the easier the transition is.

Start at the very beginning: review
To successfully plan, we must first identify your family, financial and structural positions. This includes your family structure and dynamics, current assets, existing business operating and asset holding structures, the debt of the business, loan to value ratios and financial statements of all the relevant people and entities.

Often, we will ask family members to prepare a confidential position statement, or have a confidential discussion with us, to identify what their current involvement with the business is and what they would like their future involvement to be.

The method of transferring assets or control to those transitioning into the business will depend on how those assets are currently held. For example, are they owned by individuals, companies, trusts or superannuation funds. The taxation and stamp duty implications will be different depending on that ownership.

It will be important to determine which of the entities involved is primarily responsible for the debt of the business and which of the family assets are encumbered by that debt.

Any inter family loans must be identified so that the ramifications of transferring control of the various family entities can be identified. For example, there will be little point in transferring control of a family trust which operates the business to one child, if a second child has a significant beneficiary loan account which it can call upon from that trust.

Financiers and financial advisers are an important part of the process to determine the current financial viability of the business and the viability of different alternatives that may be considered.
I have a cunning plan: documenting the plan
Coming out of the review process, we can start to address the following in the plan:

  • What are the family issues to be considered?;
  • What is the outcome the family is seeking?;
  • Which family members should become owners/controllers of the business or underlying property used in the business?;
  • If the business/property is to be transferred, what is the best way for that business/property to be held to allow for future succession planning, asset protection and tax management?;
  • What are the tax and stamp duty implications on the transfer of any business/property or the control of any entities, and how can that be managed?;
  • Which family members should receive income from the business and how is the amount of that income to be determined?;
  • What is the timeframe for the transition of family members into or out of the business?;
  • What assets and income can family members transitioning out of the business access to support themselves. How much is enough?
  • Providing the family members relying on the plan with the certainty and security that the plan will be implemented, and if challenged can be enforced;
  • Allow for contingencies:
    • incapacity
    • death
    • relationship breakdown
    • financial failure
    • litigation against the business or family members from outsiders
    • introducing members
    • exiting members

The succession plan should be documented in a way that makes it enforceable. The plan should then be implemented. The plan will usually require more documentation than one document called a succession plan, but in our experience the process will be much easier if there is one governing document which contains the essence of the plan.

If you would like to discuss any of the issues raised in our succession planning bulletin please contact us.

In our next and final bulletin in this series, we will look at what happens after signing the succession plan. Click here to read more.

Click here to read Part 1 of ‘Our Succession Planning Bulletin Series’

Click here to read Part 2 of ‘Our Succession Planning Bulletin Series’