In brief - All businesses should plan for transfer of
There is an endless amount of information available on the
internet on the "dos and don'ts" of running a family
business. While the plethora of advice on this broad topic varies,
business succession planning is a consistent theme. Particularly,
why it is so important for family businesses and businesses
generally to have one.
So, what is a business succession plan? And, more importantly,
why does your business need one?
Succession planning may protect the business from personal
A business succession plan comes in many different shapes and
The business succession plan that is appropriate for your
business will depend on a number of factors such as the type, the
size and the structure of the business.
A properly considered succession plan will (with the assistance
of the appropriately drafted documents) cause a course of events to
take place once you decide to exit the business voluntarily, or if
something happens which forces you to exit the business (otherwise
known as a triggering event).
Examples of triggering events include total or permanent
disablement, death, divorce and bankruptcy. In these circumstances,
the succession plan would operate for the protection of the
business from becoming embroiled in disputes which are personal and
do not strictly relate to the business.
Business owners should agree on plan structure and consider tax
There are different ways to structure a business succession
plan. However, the plan usually involves owners of a business
reaching some agreement about what will happen to an owner's
interest in the business when a triggering event occurs, or when an
owner voluntarily decides to leave the business. Some examples are
(this is a non-exhaustive list):
Buy/Sell agreement - this is a contract between the owners of a
business in which they agree on how their respective interests will
be transferred to the other upon a triggering event occurring, how
that transfer will be funded and timing requirements. They usually
contain a put and call option whereby upon a triggering event
occurring, the sale of the affected owner's interest in the
business is forced and the ongoing owner is required to purchase
the affected owner's interest in the business. Most commonly,
this purchase is funded by way of insurance which is specifically
designed for this type of circumstance.
Shareholders' agreement - this is a contract which is
entered into between the shareholders of the company. It deals with
how shares in the company are to be transferred upon a voluntary or
involuntary exit from the business, how the transfer of shares will
be funded, voting rights and powers and other administrative
matters which relate to the operation of the company.
As is the case with most transfers of ownership, there can be
tax implications which must be considered when determining which
type of succession plan is right for your business. You should
therefore obtain specific advice from a qualified accounting
Financial hardship or unexpected operational changes may be
Succession planning is important because no-one can predict when
something might happen to cause a business partner to have to leave
the business suddenly. For businesses without a succession plan,
this element of unpredictability leaves the business exposed to
potential financial hardship, or to operating in a way that was not
For example, consider a scenario where your business has no
succession plan in place and your business partner passes away
suddenly. By his Will, your business partner's wife is
appointed as his legal personal representative and she steps into
the deceased's shoes as business owner. A situation like this
can, at the very least, disrupt business activities and, in some
extreme cases, cause the business to become completely
dysfunctional due to a clash of personalities and conflict within
the business. This type of scenario can be avoided by having a
carefully considered business succession plan in place.
All businesses need a carefully drafted succession plan
Whether you run a family business or simply a business with
trusted colleagues, giving thought to these issues is important.
Taking action and discussing with your business partners what
business succession planning options will be right for your
business and putting such a plan in place is essential.
Do not depart from the contract terms, or encourage the other party to do so, unless you plan to alter the contract.
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