ARTICLE
20 February 2024

A simple guide to succession planning for small business

HL
HHG Legal Group

Contributor

HHG Legal Group has been serving Western Australians for over 100 years. With a large team across five offices, we offer top-notch legal advice and representation, exceeding expectations for all clients.
Before commencing the succession planning, you need to identify your goals.
Australia Corporate/Commercial Law
To print this article, all you need is to be registered or login on Mondaq.com.

Navigate the complexities of succession planning for small businesses with ease, following the straightforward guidance provided by Emma Catterall, an Associate in our Wills, Estates & Succession Planning team.

Succession planning is the process of putting in place strategies to future-proof your business, whether that be from loss of key personnel, sale of the business, your retirement or your death. Succession planning for small business is largely dependent on the structure of the business itself. Whether your business is run as a sole trader, partnership, company or trust structure will determine the advice provided to you by an experienced succession planning lawyer. Before commencing the succession planning process, you will need to identify whether your goal is selling your business and transitioning to retirement or another career opportunity, or passing your business on to a child, family member or other successor.

EstatePlanning

Succession planning for small business is considered as part of the estate planning process. What will happen to your business if you die or lose capacity is an important consideration for all small business owners. Depending on the entity of your business, you may need to consider additional steps outside of the standard estate planning process. For example, although a sole trader may choose to gift his business assets to a beneficiary under their Will, or in the event of lost capacity have his attorney step in to manage their business affairs, a partner in a partnership will need to refer to the original partnership agreement to determine what is required on their death or loss of capacity.

Business Conducted in Partnership with Others

When your business has been set up in partnership with others, whether through a partnership agreement or other arrangement, it is likely your partner/s will want to continue on in the business if you retire or will want to be given the option to purchase your interest in the business on your death. It is important to consider this when establishing your business to ensure appropriate agreements are prepared to address these occurrences. This will also ensure a process is in place if a disagreement occurs and it is no longer possible for all partners to continue in the enterprise.

As business partners want the ability to acquire the other partners' interest in the business on their retirement or death it is important sufficient funds will be available at the relevant time. To ensure the surviving partners have sufficient funds available to purchase a deceased's partner's interest from their Estate, life insurance policies will often be recommended. A policy is taken out against each partner by the other partners in the business who are the policy owners and beneficiaries. On the death of a partner the surviving partner/s can then use the policy funds to acquire this interest from the deceased partners' estate. Similar arrangements will also be included in shareholder agreements to ensure shareholders can acquire the shares of the deceased shareholder's shares from their Estate. Before these insurance policies are purchased it is necessary to have a business valuation completed so that the insured value reflects the value of the interest in the business. This amount will also need to be regularly assessed as the value of the business changes.

Trusts

If the business is run through a trust you will need to consider who should run the business when you lose capacity or die. An appropriate successor appointor and guardian will need to be appointed via your trust deed, or through a supplementary document. If you intend to pass your business down to your children, you will need to consider which child/ren (if any) want to run the business when you can no longer do so. If it is unlikely the business will continue operating after your death you may choose to sell the business assets during your lifetime so that the trust can be wound up.

Sale of Business

On your retirement, you may choose to sell your business to a known or unknown party. This can be done via a contract for sale. Before signing a contract for sale you should seek legal advice on the contract to ensure there are no unintended consequences. It is important to consider the likely restraint of trade that will be included by any prospective buyer and the transition period clauses that it will likely include. If you are hoping to retire following the sale of the business you will need to ensure the contract for sale does not include a lengthy transition period requiring you to be available to the buyer for assistance. If you are hoping to establish a new business, you will need to seek legal advice to ensure you do not unknowingly breach the restraint of trade clause. If you own the land from which your business operates you may choose to sell the land to the buyer in conjunction with the sale of the business or to rent it to them. You should take both legal and accounting advice on which option is most appropriate for your circumstances.

Putting a Successor in Place Early

If you employ a team of managers it is important to consider the consequences of key personnel resigning or retiring. If you do not have a system in place to identify future team leaders you may experience difficulties replacing these key personnel from outside your business, which can be time-consuming and expensive. Emerging leaders in your company should be provided with all necessary training and experience that will allow a seamless transition when key personnel retire. This process should be reviewed regularly to identify any gaps and areas of improvement, and also to identify other potential successors in your business. The benefit of doing this will also likely improve staff retention as staff will be aware of the chance for career progression within the business.

FAQS

When should I consider succession planning for my small business?

Ideally, succession planning is considered when your business entity is being established. The goals you have for your retirement or business exit will impact the advice given on particular business entities. Business succession planning can however take place at any time after the business entity is created. If you are considering retirement or selling your business, it is important to meet with an experienced professional to discuss your goals.

What legal considerations should I keep in mind during business succession planning?

During the succession planning process, your lawyer will discuss your business entity structure, your goals for the future, your personal estate planning, and tax considerations for the strategies put in place. Your lawyer will work with your accountant to ensure the implemented plan is appropriate for your personal finances and those of your business.

How can HHG Legal Group assist with estate planning?

We can provide guidance and assistance throughout the succession planning process. Our team of commercial and estate planning lawyers can help you navigate legal complexities and develop a comprehensive succession plan that aligns with your business goals and objectives.

How can HHG Legal Group assist with estate planning?

Our estate planning lawyers can provide advice on all estate planning documents and can discuss the appropriateness of these documents for your circumstances. Our estate planning lawyers can identify any potential risks in your succession plan.

Can HHG Legal Group assist in preparation of sale of business agreements?

Yes, our commercial lawyers are experienced in preparing the sale of business agreements for all business entities. Our lawyers are also able to provide advice on contracts provided to you by any potential buyer. Our team can also act for you in the business settlement process.

Can HHG Legal Group help with business valuation during business succession planning?

Yes, our team can work with your accountant and an accredited valuer to assist you in assessing the value of your business.

How often should I review and update my business succession plan?

It is recommended to review and update your succession plan annually or whenever there are significant changes within your business or personal life.

When it comes to planning succession in your business, HHG Legal Group can be your trusted partner. With our extensive experience and expertise, we understand the unique challenges and complexities that small businesses face.

Our team of legal professionals is dedicated to providing tailored solutions that align with your specific needs and goals. By choosing us, you can be confident that you are working with a team that will guide you through the entire succession planning process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More