By Andrew Hayes, Director, Westlawn Business Services 26 August 2015
Several reports released recently highlight the need for Australian businesses to take the issue of succession planning more seriously. While over the coming years, baby boomer business owners will begin retiring in ever-increasing numbers, too few are planning ahead now for the changes that will inevitably come.
Less than half of businesses have an exit strategy
Accounting firm RSM Cameron Bird’s Think Big 2015 report reveals that less than half (44%) of Australian small and medium enterprises (SMEs) have an exit strategy in place.
This is surprising when you consider that the report also found that:
16% of small business owners plan to exit their business this year
19% plan to exit within the next 2 years
22% plan to exit in the next 3 to 4 years, and
41% plan to exit in the next 5 to 10 years.
By 2020, the baby boomer generation (those born between 1946 and 1964) will be aged between 56 and 74, with the majority at the older end of the age scale. This suggests a significant number of baby boomers will likely be in the process of transferring ownership of their business over the next 5 years.
In a similar study, professional services firm, PwC, estimates that 1.4 million Australian family business owners will retire over the next 10 years. However, PwC’s 2014 global family business survey, Building for success today and tomorrow, found that just 8% of Australian family businesses have “robust and comprehensive” succession plans in place. This is well behind the global average of 16%.
Managing family conflict
One critical component of a “robust and comprehensive” succession plan is managing family conflict. But yet again, many Australian business owners fall well short in this area. According to the PwC survey, almost one third of Australian family businesses have no procedures in place for dealing with family conflict that may arise when the ownership of the business transfers to the next generation.
A sound succession plan that manages family conflict should anticipate and address any possible areas of contention. One such area of contention, for example, may arise where family members who take a passive role in the future ownership of the business want higher dividends, while family members active in the management of the business may want to reinvest profits back into the enterprise as working capital.
The Think Big 2015 report also found that proceeds from the sale of the business will be the primary source of retirement savings for approximately 30% of survey respondents – slightly less than in 2014.
The superannuation of ageing business owners is an increasingly significant factor when family businesses change ownership to the next generation. The size of the business owners’ retirement savings is likely to influence how much money they expect from the business to finance their retirement.
For many owners, the business may well be their largest asset. So maximising the potential sale price of the business is vital.
But, according to a MGI Australian Family and Private Business Survey released in June 2013, 75% of business owners admitted their business was not sale- or succession-ready. Further, more than half said they did not intend to do anything about getting their business sale- or succession-ready in the next 11 months.
A well-planned business exit will not only enable the business to attract a higher sale price, it will also help minimise tax on the proceeds. Options to help minimise tax may include staged payments, superannuation contributions and taking full advantage of available tax concessions.
Develop a sound succession plan When developing a succession plan for your business, some of the questions to address include:
What type of succession are you planning? Will you be completely removed from the business or remain partially involved? If it’s a partial succession, what will be your future involvement in the business?
Who will take over as successor? Will it be a family member, business partner or someone else? How and when will you communicate this to the business? Do you have an alternative successor in mind as a contingency?
When do you plan to implement this succession?
How will you ensure staff skills are maintained? Do you have an appropriate allocation of responsibilities? How will the new responsibilities be documented and communicated to staff? What internal processes will you implement to regularly check that the current skills of staff remain appropriate for the business?
If in a partnership, do you have a buy-sell agreement in place? And if so, what are the terms? Will the remaining partner(s) buy your partnership share or will it be open to external partners/family members? Does this arrangement apply to all partners?
What are the risks to the succession plan and what are the contingencies?
Have you started planning for an exit from your business
DisclaimerWestlawn Business Services Pty Ltd provides this information for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.