Business Succession and Asset Protection
A survey conducted amongst family businesses revealed that only one third had formal succession or exit strategies in place. What happens if the owner or director of a family business dies or becomes incapacitated? What happens when there is an urgent need or opportunity to sell the business?
Importance of Succession Planning
The vast majority of Australian businesses are conducted under one of the following structures:
- Sole trader or partnership;
- Private company;
- Family Trust; or
- Combination of the above.
Asset protection, taxation and operational practicalities often are the critical driver of the choice of structure. Another relevant consideration but one which is often overlooked is the matter of transition to new ownership whether that is within the family, to management or to a third party.
Most businesses do not have a suitable business succession or exit plan. This can have severe consequences on the personal finances and cohesion of the family particularly if there is a major disruption to the business such as the death or disability of a key family driver or a marital breakdown of a family member involved in the business.
Too often we find (as confirmed in the 2013 survey) that owners of family businesses have not addressed these questions, resulting in disputes and loss of value opportunities.
What is the solution?
Although it is important to have a validly drafted Will, it only deals with property in the personal name of the business owner. Most of the matters which must be addressed to successfully transition control and ownership of a business will fall outside a Will. Other asset protection mechanisms which could be used to ease the transition include special purpose trusts, assignments of rights, binding financial agreements, powers of attorney and testamentary trusts.
If that unexpected event or opportunity has not yet arrived, business owners should seek advice and start to planning for suitable arrangements and strategies for business transition. Failing to plan is planning to fail.