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Business Succession - 7 min read

 

With a well-executed succession plan, the business you’ve built can continue to thrive and grow long after you’ve stepped away from the helm.

 

But how do you develop a succession plan? And amid your hectic schedule, when will you ever have time to tackle such a project?

 

Before we delve into these questions, let’s take a glance at the essential components of an effective business succession plan.

 

  • Development of your future business leaders
  • Analysis of your corporate finance structure options
  • Business valuation, including fair market value, investment value and liquidation value
  • Management of the general transition process
  • Alignment of family interests
  • Balancing of your financial returns

 

What Types of Businesses Need Succession Plans?

Succession plans aren’t just for large businesses. Small businesses need succession planning as much as any ASX200 company. Regardless of your company’s industry or size, you need a succession plan if you want a successful outcome for all of your hard work.

 

Consider these possible succession problems: conflicting family interests, market uncertainty, opportunistic employees just waiting for their chance to derail the status quo. It sounds dramatic, and it certainly can be. Avoid the drama and provide your business with a smooth transition by writing a foolproof succession plan.

 

Is succession planning simple? Unfortunately, it’s not. It requires careful consideration and a proposed approach. But your efforts will be rewarded with a profitable transition.

 

The Succession Planning Process

Surprisingly, succession planning isn’t just about the future. It also affects how your business operates today. In fact, most business owners find that creating a succession plan improves their current operations and opportunities in startling ways.

 

Your current operations will give you a starting point for devising a plan to protect the following:

  • Assets
  • Future growth
  • Harmonious structuring
  • Optimised taxes
  • Worry-free retirement for owners
 

To secure these benefits, business owners should include the following items in their succession planning process.

 

Development of Future Business Leadership

Preparing successors for leadership is one of the most important aspects of a succession plan. You’ll need to thoughtfully consider who wants to be a leader, who matches the business’s objectives, and who presents risks.

 

People come and go, so don’t pin all your hopes on one person. Instead, define essential roles and analyse your current talent crop. Your goal is to prepare them well for their future responsibilities.

 

Analysis of Corporate Finance Structure Options

The business’s structure affects taxation and how easily you can transfer wealth. The most advantageous structural options allow businesses to grow and transfer wealth without incurring heavy taxes on stakeholders. Your financial adviser will be able to help you determine which options will work best for your business.

 

Business Valuation

The value of a business can change dramatically over time, and the value can be different depending on the purpose of the valuation. Business valuation can be divided into three categories: fair market value, investment value, and liquidation value.

 

With accurate valuation data at the ready, you’re prepared to evaluate offers, consider mergers or weigh other opportunities as they arise.

 

The valuation of your business may change substantially before you exit, but a proper assessment will assist your succession planning. It can help you to make appropriate long-term plans about divisions, transfers, and consolidations.

 

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Family Business Succession Planning

Family-owned businesses face additional issues that can be smoothed through thoughtful business succession planning.

 

Generational Transition

Successfully handing a business down from one generation to another is difficult and emotionally charged. You may need to deal with unequal wealth transfers, resentment, diverse family structures, jealousy, and other troublesome issues. A thoughtful succession plan can minimise these issues and keep communication clear and open.

 

Alignment of Family Interests

The older generation may be counting on the family business to fund their retirements while the younger generation may have different ideas about the direction of the business. Again, working through the details of a succession plan can help to align family interests and avoid conflict.

 

Balanced Financial Returns

Buyout agreements can cause contention within a family business. When the retiring generation looks to the value of their interest, they tend to look at the bottom of the balance sheet.

 

However, the true value of a business should be based on an earnings capitalisation model instead of the balance sheet number. Working through this concept can be difficult, but it usually results in a fairer plan for all parties involved.

 

Start Your Succession Plan Now

You’ll achieve the best results from your succession plan when you begin early. The sooner you start, the more time you’ll have to implement your plan, mentor future leaders and prepare your business to transition.

 

If you’re working through your own succession plan or needing help getting started, contact us at Altus Financial. With objective, third-party expertise at your side, you can work through the issues and prepare yourself for success.

 

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