An up-to-date will is an important legal document for personal estate planning but is often not the way to hand over the keys to a business.
Business succession planning – and sometimes the succession itself – is an emotional journey and a highly complex process that is best undertaken while owners are very much alive.
Let’s first touch on the purpose of a will. It is often a very dry document that spells out your wishes for your property and assets, as well as the care of your dependents. Importantly, it only addresses those people who stand to directly inherit assets and only becomes effective after you pass away.
A change in business ownership, whether through retirement, prolonged absence, sale or sudden death of founders is going to be hugely important to the business’ ongoing success, affecting staff, customers, suppliers and financiers let alone the family members left to run the business.
With succession planning, issues arise that cannot necessarily be handled through a will.
Matters can be particularly tricky when it comes to family-owned companies. A will only deals with assets you own and may not be the mechanism to transfer business-related assets to loved ones or specific individuals when you die.
For example, it may not be relevant for dealing with family discretionary trust assets as the individual with ultimate control is usually the appointor.
The primary practical reason for not naming a business successor in a will is one person does not usually have the authority to do so.
Business control is generally governed by a constitution and bound by corporate law, while ownership of the controlling shares may be held in a trust which is ruled by its trust deed.
Furthermore, wills can be contested, which could prolong delays and potentially cripple the business. When a person is gone, there is no opportunity to understand why a decision was made.
If an owner suddenly dies, there will inevitably be a vacuum that hampers operations. Who is the key decision-maker in the absence of authority?
Without a business succession and continuity plan, a business may be unable to appoint key staff, and make critical operating or financial decisions.
There may be director guarantees, which are common among family-owned businesses and tied to a specific person. These cannot simply be handed over in a will.
Similarly, personal properties being left to other siblings may have mortgages over them tied back to the business. These issues can have dire consequences for the deceased person’s family when they discover there are insufficient net realisable assets to fund their lifestyle.
An owner may have, over time, turned a small enterprise into a sprawling venture but in business, relationships are everything.
Suppliers and financiers need to build new relationships with new directors, which with proper succession planning can be done over time, and gives them peace of mind and familiarity with the people they will be dealing with in the future.
It may be unlikely that shareholders, suppliers and directors would retain the same level of confidence in the owner’s daughter or son if that person suddenly became the business owner, without having established any rapport.
The risk is, without clear business succession planning communicated well, over time disputes may evolve among family members and/or business partners about who should take over and how the business should be managed.
Then there is the question of what the business is worth and who will be inheriting it.
A well-documented buy/sell agreement between business partners as part of the succession plan would ensure that should certain ‘trigger’ events occur, the business ownership passes onto the other business partners while the family of the existing owner is adequately compensated for the value built in the business.
Failure to have such a documented succession plan can see the family thrust into the business with the other remaining partners.
For all the warnings, there are many succession success stories and they come from starting conversations and planning at the earliest opportunity.
It starts with a simple question: what is the legacy you wish to leave?
Will the business stay in family or familiar hands, or will it be time to sell and distribute cash to the family? Will your spouse or children be willing to take on the responsibility of learning the business, and how will this be achieved? How will key staff react to a change in control?
It might not even be about running the business but ensuring all your family are looked after.
Consider a real-life example of a family-owned business with four children. Two work directly in the business and the parents wanted to reward them, given they have passed up other opportunities and contributed to the growth of the business, often working long hours for very low income.
The parents want to make sure all the children are treated fairly without draining the cashflow of the business in their retirement and while retaining balance sheet strength, which means building assets outside of the business.
Business continuity needs to be bedded down with a formalised structure for directors and an independent chairperson, which improves governance and strategic planning, yet recognises the change of control and the involvement in core decision-making.
A set retirement date becomes the line in the sand when control will be handed over, giving children, staff, customers and suppliers clarity, while non-business assets support the children not in the business.
The critical factors in making it work are open communication with all stakeholders, strong relationships with banks and lenders, the separating of assets, building assets outside of the business, a shareholders agreement and buy-sell agreements.
As you can see, succession planning may take several forms. It might be the classic scenario, orchestrating the future transfer of business control to the next generation that ensures continuity and the handing down of a legacy.
Succession can also be around the sale of a business, such as the consideration of an unexpected offer. Other factors that may facilitate a decision to sell could be a buy-in from key staff that may be done over time or through a single transaction.
Through succession planning, staff, suppliers, customers and financiers will have been working with current and future owners over time so there is a broad understanding of the outcome and few surprising elements.
Business succession planning is a highly complex process that requires a greater effort in protecting the legacy and brings to the table a broader group of people with interests in your business who would not otherwise be considered in a will.
Robert Prince and Julie Strack are executive directors at Pitcher Partners Perth.
Disclaimer: Robert Prince (454 781) and Pitcher Partners Wealth WA Pty Ltd (1274651) (ABN 74 630 996 664) are authorised representatives of Sentry Advice Pty Ltd, AFSL 227748.
The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.
