Business Succession: Key Issues To Consider
Updated: Aug 16
ASF TAKEAWAYS: The key to an easier pathway to business succession is planning. Business succession planning is essential for ensuring the long-term success of your business. Start early, get professional help, and be flexible and adaptable. By following these tips, you can increase your chances of a successful succession!
WHAT IS BUSINESS SUCCESSION PLANNING?
Business succession planning is the process of ensuring the smooth transition of a business to the next generation. It is an important step for any business owner who wants to ensure the long-term success of their company.
There are many key issues that business owners need to consider when planning for succession. These include:
Identifying the successor: Who will take over the business once the current owner retires or steps down? This is an important decision that should be made carefully, especially in family successions. We have seen many a family dynasty start to crumble based on this decision alone (plus it makes for riveting TV!).
Developing a succession plan: Once the successor has been identified, a plan needs to be put in place to outline the transition process. This plan should include the timeline for the transition, the strategies for transferring ownership, and the roles and responsibilities of all parties involved.
Financing the transfer: The transfer of a business can be expensive, so it is important to have a plan in place to finance the transaction. This may involve providing vendor finance to the successor, selling the business to an outside buyer, or some other arrangement. It is important to also be cognisant that the successor will likely want the current owner to be associated with the business in some form for a period of time, or even undertake the transaction with a series of earnout arrangements - all these complexities must be discussed and agreed prior to opening the conversations to the proposed successor, especially in an external sale.
Tax implications: Business succession can have a number of tax implications, so it is important to consult with a tax advisor to ensure that the transaction is tax-effective. The ability to access the small business capital gains concession, for example, may drive the owner to pursue only a share sale rather than an asset sale, and the business sale must be dressed up appropriately.
Restructuring the business: The succession process can be a good opportunity to restructure the business. It is important to recognise that the structure that has been used for business operations purposes may not be ideal for a sale, and therefore an organisation restructure may be required. Our recommendation remains that the conversation regarding business succession with professional advisors must occur at least three years prior to the actual transaction.
Personal estate planning: Business owners should also review their personal estate planning documents to ensure that they are up-to-date and reflect the changes that will occur as a result of the succession.
TIPS FOR SUCCESSFUL SUCCESSION PLANNING
Here are some additional tips for business succession planning:
Start early: The earlier you start planning for succession, the more time you will have to identify a successor, develop a plan, and address any potential challenges.
Review your business strategy: the succesion plan have to align with your long held goals and beliefs; any divergence on these would lead to struggles to get everyone on board. Therefore its essential to review your business strategy before advancing on succession planning. This will help reinforce the strong foundations that you would have constructured over the years and carry you into the future.
Get professional help: There are a number of professionals who would be part of your team with business succession planning, including lawyers, accountants, and business brokers. If your succession plan doesn’t address tax implications for your business structure, your transition could encounter significant bumps in the road. Discuss possible changes in business structure with a business succession expert who can anticipate the tax implications of each type. It’s simpler to make entity changes now than when you’re going through a succession.
Be flexible: The succession process may not go exactly as planned, so it is important to be flexible and adaptable. For example, having several qualified people in the wings will ensure that you are not left in crisi mode if one of them decides to pursue other opportunities.
Integrate succession with recruitment: a more holistic approach must be taken when recruiting new employees. Does the business need short or long term workers? How will each person fit in? Does the new employee fill a talent void and is it required for the long term?
Focus on skills: invariably, most businesses owners tend to place all hopes on a particular person for internal succession planning. ealistically speaking, however, those people may not be around when you’re ready to exit, or they might decide to pursue a different course. Instead, focus on the skills necessary for keeping your business stable and prosperous. Teach and train your employees to develop these skills, and when you hire new talent, look for these competencies.
Communicate with all stakeholders: It is important to communicate with all stakeholders, including employees, customers, and suppliers, about the succession plan once it has been fomulated.
Business succession planning is a complex process, but it is essential for ensuring the long-term success of a business. By carefully considering the key issues involved, business owners can develop a plan that will help them smoothly transition their business to the next generation.
The team at ASF have assisted in many inter-generational transfer of businesses as well as sales of businesses, and are well versed to advice on this. Please reach out as needed.