Most businessmen spend most of their lives building their business and none of it planning how to get out of it. Everyone eventually gets out by one method or another, sale, family transfer, management buyout, etc., even by means not planned, such as illness. The owners who walk away with the best result are rarely the luckiest. They're the ones who started early.

What Is Business Succession Planning?

It is simply preparing your business, your money and your employees for a shift in leadership or ownership of the business. An effective strategy addresses some tough questions. Who runs things when you step back? Do you sell, pass it to family or hand it to your managers? What's it really worth, and how much do you need from the exit? And if something happened to you tomorrow, what then?

Your Main Exit Options

Selling to a third party

A trade sale or investor sale often brings the highest price, especially when the business runs smoothly without you. It isn't quick, though, and due diligence will expose anything messy.

Family succession

Passing the business on can keep a legacy alive, but it can also stir up tension. Is your successor capable and willing? How will you be fair to the children who aren't involved?

Management buyout

Selling to the important managers ensures continuity for both the employees and the clients. The issue usually becomes one of finances, thus such transactions are usually made on installments.

Winding down

However, in case the company depends too much on you, then shutting it down could be an honest thing to do. However, there is still the need for asset planning.

Step 1: Understanding What Your Business Is Worth

Getting a valuation provides you with an estimate based on facts rather than assumptions. Get your advisor to look at the business from the buyer's point of view. The usual value killers are owner reliance, profits that bounce around, patchy records and a few customers bringing in most of the revenue.

Step 2: Make the Business Less Dependent on You

If the business can't run without you, buyers will discount it heavily or walk away. Write down how things are done, build a second tier of managers and move key relationships off your personal phone. Of all the business growth advice we give owners, this probably does the most for value.

Step 3: Sort Out Your Financial Affairs

Numbers you can stand behind will be required, which will include current management accounting records, updated tax returns, and a profitability history you can account for. It is simple enough to put everything straight three years in advance; not so easy amid a deal.

Step 4: Consider Tax Early

The way the business is structured as well as the sale itself may affect the amount of tax paid. The seller might be able to take advantage of small business capital gains tax concessions, including the 15 year exemption, 50% active asset discount, retirement exemption or rollover concession. Some of the conditions are based on the period of time of ownership, so get some advice in plenty of time.

Step 5: Plan for Life After the Sale

Selling a business is not only an important financial event but also a personal one. Plan for what you will need in retirement or for your new business venture, and how you will put the money from the sale, superannuation and other investments together.

Step 6: Protect Against the Unexpected

If an owner dies, falls ill or can't work, the business can tip into crisis overnight. A shareholder agreement should set out what happens next. Buy-sell arrangements, often funded by insurance, let remaining owners buy out the affected owner's share. Your will and enduring power of attorney should cover your business interests too.

A Simple Timeline

Within three to five years from now, get an appraisal, reduce reliance on the owners, and sort out your financials. Within one to two years from now, plan how you will exit and find buyers or successors. In one year, conduct the sale and have discussions with employees and key clients.

Seeking Counsel in Advance

Succession planning is most effective when your accountant, lawyer, and financial advisers are all on the same page. DFK Benjamin King Money provides business advisory services to Melbourne owners, from understanding value to planning an exit that suits your goals. If you're thinking about what comes next, we'd be glad to talk.

Frequently Asked Questions

1. When should I start succession planning for my business?

Plan three to five years prior to exiting the business or even earlier so that there will be ample time to increase the value of the business and plan for the tax implications of exiting.

2. How is a business valued for sale?

The valuer analyses the income stream, growth potential, assets, client base, risk and similar sale prices. Methods vary according to the type of business.

3. What role does a business adviser play in a handover?

Your advisor helps you in evaluating the value, preparing the necessary paperwork, making tax preparations, and looking at the exit strategies.

This article is provided for informational purposes only and does not constitute legal, tax or financial advice.