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Succession planning: leave your business in good hands

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Careful succession planning will enable you to walk out the door on your own terms and maximise your profits

Plan a smooth changeover

If, like me, you love working in your own business, the last thing you want to do is think about the day when you finally hang up the keyboard.

small business succession planning

However, not even Rupert Murdoch, Li Ka-shing or Warren Buffett can work forever and it's unavoidable that one day you'll need to leave your business.

Whether you sell, retire or quit for health reasons, it's important you plan as soon as possible for that day.

This is where succession planning - an exit plan - comes into play.

It outlines the things you will do when you transfer the ownership of your business to a third party or a family member. In fact, research from professional services firm PwC shows that more than 1.4 million owners employing more than 7.9 million people and contributing almost $500 billion to our GDP will retire in the next decade.

To my way of thinking, this will create a significant logjam of older owners concurrently seeking to realise some business profits. The canny ones will therefore develop an exit strategy that establishes a smooth transition to a new proprietor while maximising their stake in the value of the business.

Share your success

Succession planning does not necessarily mean selling up - maybe there are people within the firm, whether they are family members or not, who might like the chance to take it to the next level.

"Think about the people who have helped you build the business and what role they may want to play in the future," says David Gonano, executive director at Macquarie Business Banking. "They could be interested in buying part equity now, so you can gradually step back but still maintain an income stream and equity interest."

This is where your business structure and financing facilities can make the difference. "You may assume your staff don't have the funds to purchase equity outright but that doesn't mean you need to sell the whole business to someone else," says Gonano.

For example, some commercial lenders may use selected business assets as security to fund new shareholders into the business and ensure an income stream for the existing owners.

"This gives you more options to work in the business the way you want. It also provides continuity for staff and clients."

Know what it's worth

It's critical you know what your business is worth when you start the succession planning process.

This often involves getting a realistic, independent valuation of your business from a business broker or professional valuer.

At the same time, make sure your financials and operations are in order - your accountant should carry out a financial health check, and it may be worth having external due diligence done on your processes, procedures, documentation, job descriptions and management systems, according to Gonano.

Exit tax

Be mindful there could be tax implications when transferring or selling your business.

For example, when you dispose of, or transfer, your business assets there are likely to be capital gains tax (CGT) consequences. The sale of a business can also trigger liabilities in relation to GST, fuel tax credits and excise duty, according to the Australian Tax Office (ATO).

Any significant changes to your business structures or operations, including any asset disposals, should be fully documented, says the ATO, along with their tax impact.

Ensure information on your assets such as acquisition dates and the original cost base of the business, if applicable, is properly documented. This will help the new owners ensure any subsequent asset disposals associated with the business can be treated correctly for tax purposes.

Finally, existing owners as part of the succession planning process should decide on their future role within the business. If you're not ready to move on completely, define your role and make sure you're rewarded appropriately, advises Gonano.

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Anthony O'Brien is a small business and personal finance writer with 20-plus years' experience in the communication industry.
Comments
Juhani Tontti
November 19, 2016 5.10am

Thanks, this is a good article, because it made me to think! Yes, what shall I do on the day, when I want to stop doing my business? Well, at least I must have a plan for exit! I think the best way is to sell and the best timing is to start that process, when the business is still flying high. But still, how to set the price and with what terms? All in cash or part depending on the future profits? In all cases the buyer must be professional, who understands how to run this. Only then can he understand the value.

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