“It is far better for all concerned to have these issues identified early in the life of the business, rather than at some later date in the future when working together, or dissolving a partnership may be fraught with difficulty and disagreement.”
AFRM specialises in “Business Succession Planning” to financially protect businesses and the estates of the owners from sudden, unplanned events such as the death or disability of business owners and/or key personnel within the business.
Paragraph 134 of ASIC’s REGULATORY GUIDE 259: Risk management systems of responsible entities acknowledges the importance of succession planning as a means of mitigating risks to a business.
Whole of government business information website, www.business.gov.au also dedicates a part of its site to advice on the importance of having an appropriate succession plan for your business in place.
“If you develop a good succession plan, you can transition out of your business more easily. You can start your succession planning years ahead of time, which helps you meet your future needs. It will also help your successor prepare for their present and future work responsibilities.”
In fact, the Australian Small Business and Family Enterprise Ombudsman’s Office has even claimed that appropriate succession planning is “one of the key issues facing family businesses in Australia.”
AFRM Adviser, Philip Hatherly’s experience with clients over the years means he knows only too well what can happen when otherwise savvy businesspeople overlook the important issue of ensuring a formal business succession plan is in place.
“Sudden and unexpected death, illness or serious injury can have disastrous effects on a business,” Phil said.
“Issues that arise can range from the challenges involved in extracting an estate (personal or family) from ownership of the business, supporting an owner who can no longer contribute to the business, and also loss of revenue impacting upon the business’ profitability.”
“A well-constructed succession plan not only addresses equity succession issues, but also ensures the business has all the resources needed to continue to operate in the wake of a partner suffering an unforeseen tragedy.”
AFRM’s business succession advice process guides clients and all related parties in the business through a formal examination and consideration of all relevant issues.
“Our process raises a number of potential issues that need to be documented into a formal succession agreement that defines unforeseen events, and how the financial impacts are dealt with,” Phil said.
“The aim is – that if the worst should happen – all parties already have a detailed, previously agreed, plan to follow, rather than trying to work it all out after an event, which can have disastrous results. For example, seeking to negotiate with an estate over an agreed ‘fair value’ of a deceased partner’s equity value.”
Phil said AFRM’s scope of succession planning advice may also incorporate life insurance funding if it is required.
Sometimes, this process of identifying and quantifying impacts and how they are dealt with can uncover previously unrecognised issues between the business owners themselves.
Phil said AFRM worked on a case a number of years ago in which a law firm brought AFRM in to guide two proposed business partners through the formal process of succession planning.
The clients, John and James (names changed to protect client privacy), had decided to buy an existing business and had agreed to own it via a separate company, with both of them being working directors of that company.
Phil said AFRM, with John and James, started working through all of the usual issues discussed and agreed through the process of formulating a formal business succession plan.
“These discussions can be fairly protracted, because the owners need to agree on such things as a business valuation method, funding arrangements and timelines, the working directors’ terms and conditions (much like an employment contract for salaried workers) and so on,” Phil said.
“In this case ‒ after protracted discussions on a number of points ‒ the owners eventually came to the conclusion that they simply could not agree on points critical to formalising a business succession plan; and not too long after they decided to part ways and not proceed with the business venture.”
“At face value, this may appear to be not the best result for that business, but the fact is that careful reflection by the parties involved, thanks to being taken through the process of formalising a business succession plan, led to them identifying several issues of incompatibility between the potential partners.”
“Now imagine if issues of this weight and importance are all left up to your spouse to negotiate in the event of your unexpected demise, or alternatively, having to negotiate with your business partner’s spouse for that matter?”
“At such a time of emotional upheaval and great uncertainty, what do you think the likelihood of reaching an agreement on a fair and reasonable price for the transfer of the business equity, with significant value tied up in the business for the family? Chances are that things will not go according to plan – because there isn’t one! A plan, that is.”
“It is far better for all concerned to have these issues identified early in the life of the business, rather than at some later date in the future when working together, or dissolving a partnership may be fraught with difficulty and disagreement.”
Phil notes that both John and James moved on in different directions and each ultimately developed highly successful businesses – just not together.