Succession Planning for Your Business

Why Plan for the Future of your Business?

Two out of three Australian businesses are family owned, yet it’s estimated that only one in four such businesses pass to the next generation.  Experts attribute this to a lack of business succession planning, with less than one in four businesses having a documented plan.

Without planning on how to deal with their interest in the business, an unexpected illness or death of a partner or shareholder can lead to disputes:

• Who acquires the interest?
• What is the value of the interest?
• How will the business continue to operate?

Surviving owners can face uncertainty as they deal with inexperience or conflicting interests of the spouse (or family) of an incapacitated or deceased owner. Therefore business succession is best done pro-actively with specialist advice and planning, while all the business owners are able to make such decisions.

The Buy/Sell Agreement

A buy/sell agreement is one of the best ways to secure a family’s financial future by enabling the business to continue.  Basically, it is a legally binding document entered into by owners (whether partners or shareholders), who usually also obtain life insurance policies paid for by the business. It is designed to provide the mechanisms and funding to implement a business succession plan in case of the disability or death of an owner.

The agreement gives the surviving owners the ability to acquire the disabled or deceased person’s interest in the business and sets out the method for determining the purchase price (usually equal to the life insurance proceeds). By doing so, the agreement ensures the continued operation and control of the business by the surviving owners.

You should have a buy/sell agreement if you’re in business with other people and you want:

• your family to receive a fair value for your share and to be treated fairly if you die or are incapacitated;
• the surviving owners to continue operating the business after your death or incapacity;
• to ensure that you have the necessary funds and you can easily obtain the interest of a deceased or incapacitated owner;
  
• to elect whether to continue operating the business with the involvement of the spouse or family of an incapacitated or deceased owner.

Power of Attorney and Wills

If you have a buy/sell agreement, you should also consider a Power of Attorney and Will.  You must ensure that your Will does not contradict the agreement, which is done by inserting provisions in your Will setting out the agreements to be implemented by your executor.  You should also consider a Power of Attorney, which operates during your lifetime (unless revoked) and allows a trusted person to make decisions on your behalf if you are incapacitated.

Manage the Risk to Your Future

Without planning for the future of your business, you risk unexpected injury or death jeopardising everything that you have been building.  You can manage that risk by having a documented business succession plan, which will ensure the future of your business.

Author

Joe Kafrouni
Legal Practitioner Director
Kafrouni Lawyers

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

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