Business Succession Planning

Are you looking to protect what you’ve built?

Running a successful business often requires focus on the here and now, but the truth is, it’s never too early to start planning for the future. You will leave your business one day. How would you like it to play out?

It looks a bit different for everyone and every business. Perhaps you’ll fully retire, retaining shares while handing management over to senior staff, or transition out gradually, passing ownership incrementally to a partner or family member, maybe you’ll sell the business outright to a third party. Whatever your preference, succession planning is the best way to ensure your vision becomes the reality.

Every business needs a plan.

Even if you're not planning to retire anytime soon, you still need to plan. Change is inevitable and even at the highest level, companies experience turnover. This could be caused by retirement, death or a classic “parting of ways”. Planning ahead for possible changes in ownership or management will help you avoid disruptive vacancies.

How is a succession plan structured?

The plan will vary depending on your business, timeframe and goals. Common succession scenarios include:

• A Management Buy-Out
  Wherein a business owner opts to sell their company in full to one of the business’ existing management team or other senior employees. If one or more of the managers or other senior employees buys the business, this is referred to as a Management Buy-Out (MBO).
  
  The main advantage of an MBO is the existing relationships. The owner will know the buyer well and have confidence in them. The buyer will most likely already have relationships with customers, suppliers and staff which will make the transition smoother for all parties.
  
  
• A Share Sale to Employees
  Wherein a business owner plans to sell just some of the shares in the company to an existing, usually senior employee. In this case, the owner retains the majority of the shares. Over time the remainder of shares and the controlling interest can be transferred to the buyer. The right to buy further shares can be based on financial or other targets being achieved by the purchaser, or the company as a whole.
  
  An advantage of selling shares to an employee is bringing in someone, generally younger, with enthusiasm to run the business. They may be able to increase the value of the business with new ideas, energy and hard work. The existing owner benefits as they still hold the majority of the company’s shares.
  
  
• Vendor Financing
  In either a full sale by MBO, or partial sale to an employee, it is possible for the owner to let the purchaser pay off the shares they have purchased over a period of time. This “vendor financing” is often provided in conjunction with some bank funding which enables the owner to receive a portion of the purchase price (the bank funded part) immediately at the time of the share sale.
  
  When vendor finance is provided it is usual for the owner to take security over those shares until they have been fully paid for. This means if the purchaser of the shares were to default on their payments, the owner will have the ability to take back the shares. The security can then be registered on the Personal Property Securities Register to give the owner priority over subsequent secured parties.
  
  
• A Shareholders’ Agreement
  If shares are sold to an employee and the owner is retaining an interest, it will be very important that a Shareholders’ Agreement is prepared to set out the rights and obligations of both parties. Learn more about Shareholders’ Agreements here.

A strong succession plan is vital to safeguarding your future. Our team works with you, your bankers, accountants and other advisors to develop a custom-tailored plan, designed to achieve your goals while protecting your interests.

Contact us for succession planning advice.