Succession planning should be an exciting time for all business owners. With forward planning and a proactive approach - including the issues mentioned in this article - it can leave you financially satisfied personally, as well as ensure the ongoing longevity of the business that you've worked so hard to build.
Succession planning is essential for the smooth transition of ownership of any company. Not only can it represent a financially healthy future for the outgoing owners, succession can inject new blood into the business itself, providing fresh ideas and investment to move a business forward.
Succession strategy can vary depending on the situation:
- For family run businesses it can mean the hand over of ownership from parent to child.
- For businesses run as a partnership it can involve the sale of shares from one to another; or the action taken upon the death of one partner.
- For corporations with a more complex company structure succession can mean a merger or acquisition (M&A) or even a sale to a larger company.
Forward thinking organisations now include succession planning as part of their initial business plan. Planning can cover:
- Goals
- A timetable for transition
- Possible successors or process for sale, as well as,
- Contingency plans, such as preparing for the consequences of an unexpected death
While ideal to include during the birth of a business, succession planning can be conducted further down the track - although it is wise to prepare at least five months before the transfer takes place.
Certain themes run concurrent to succession planning, no matter if it's a family business or established SME. For example, SMEs preparing for succession need to consider both the personal and business financial implications.
On a business level, these can include:
- Are there any asset financing concerns?
One of the primary considerations for any SME undergoing a change in ownership is that many of the business' financial commitments are tied to the outgoing owner's property and guarantees. This can include:
- Overdrafts and business loans
- Equipment
- Machinery or car leases, as well as,
- A commercial mortgage or lease for the business premises
These types of finance are typically secured by tangible assets and provided to businesses based partially on the owners experience and the businesses track record under their management.
If the current owners' personal assets, such as their home, provide security for the loans, new business owners should ensure they have sufficient tangible personal assets to replace this security, or access to finance that won't make these a requirement.
The incoming owners also need to accrue suitable business experience to illustrate credibility as the future managers. This often takes some years to accrue, but is imperative for a smooth transition.
- How will a change in ownership impact on cashflow?
To cover the cost of purchasing a business, working capital for the day-to-day business functions is often neglected initially, such as purchasing raw materials or finished stock. Whilst this may only be a short-term finance problem, it can have long-term effects and be a bad start for new business owners.
Companies will need to consider how reduced cashflow might impact the business in the short-term. This is where financing, such as inventory finance, can be useful to help fund the acquisition of stock for sale, or alternatively, factoring can assist funding against debtors.
On a personal level, there are a number of financial issues that need to be considered by departing owners when planning for succession:
- What are my long-term income needs?
Considering that you're leaving a business to enter retirement, what are your long-term financial objectives? You'll need to consider the lifestyle you hope to live and evaluate whether cashing in and selling is the best move, compared to handing over the reigns and living off an income generated by the business.
Options such as a partial sale can help a young budding owner buy-in to a business, without the significant capital requirement and providing them with appropriate tutelage.
- What are my short-term cashflow needs?
You'll need to address your cashflow requirements over the short-term and decide what you need to cover current commitments and lifestyle. For a family business going through a handover, this is an important consideration, since you'll need to balance what you leave in the business for the future, with what you need now to maintain a healthy level of personal cashflow.
- What are the tax implications?
It's important to consider the succession of your business in terms of minimising capital gains. For example, selling a share rather than the entire business might be more tax effective.
If you choose to sell, injecting the proceeds of the sale into your super may also give some tax breaks. It's well worth seeking the advice of a good business tax accountant before planning your strategy.