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Negotiating a Succession Plan

 

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One Page, Two Policy Strategy

 

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Business Succession Planning

 

Have You Visited the Welcome Page?

Before you read this page, make sure you have a quick look at the general Welcome Pages starting here.

 

About This Page

This page is a guide to the pages on the Complete Succession website that deal with the commercial aspects of a Business Succession Plan.

The other tabs in the grey menu bar above can take you to the guides to other aspects of a Business Succession Plan (such as Taxation, Agreements and Legal Fees).

 

We Need a Business Succession Plan

If you've arrived at this page from the Welcome Page, you might already have decided that you need a Business Succession Plan.

Alternatively, you might have received advice from one of your Professional Advisers that you need a Succession Plan.

If You're Ready, Contact Us

If you know what type of Business Succession Plan or Business Succession Agreement you want, please contact IGS here.

 

Overview

Either way, this is the place to get an overview of what a Succession Plan is.

So...

  • What should a Business Succession Plan look like?

  • What "jobs" should a Succession Plan do?

  • Why do you need one?

 

Multiple Proprietor Businesses

The Complete Succession Website is most suited to Businesses with Multiple Proprietors or Owners.

This is because there is an identifiable Purchaser who has a commercial interest in acquiring your Equity in the Business (i.e., the other Proprietors).

Equally, if one of the other Proprietors departs first, you will normally have a commercial interest in acquiring their Equity.

 

Sole Proprietors and Family Businesses

In most cases, the Strategies discussed on the website can be adjusted to suit the needs of Sole Proprietors and Family Businesses.

However, in these cases, there is the added challenge of identifying or finding a Purchaser or new Owner.

 

One Page Summary

Click here to see an example of a "One Page, One Policy Succession Plan" for Insured Events.

One Page Summary of Strategy

There is a One Page Summary of this Succession Planning Case Study here.

Other Publications and Documents

There are many similar One Page Summaries under the heading "Publications and Documents" here.

 

What Events Does a Succession Plan Deal With?

A Business Succession Plan is designed to pre-agree a commercial and legal strategy that deals with disruptive or catastrophic events that could require or result in the exit or departure of a Proprietor from the Business in the future.

Involuntary Events

Some events, like Death, are inevitable.

Other events like Disability or Trauma are health events that are possible rather than probable.

Some Advisers call these Involuntary Events, because they happen to you, whether you like it or not (rather than you causing them to happen).

The only question is whether the Event will happen while you are still in Business (i.e., before you Retire).

Many Involuntary Events (like Death, Disability and Trauma) are Insurable Events.

Voluntary Events

Other Events, like Retirement, are Optional or Voluntary Events.

We can cause them to happen, by making a decision to Retire (even if the decision was motivated by illness, exhaustion, distraction or loss of interest).

Most Voluntary Events are not Insurable Events.

Retirement, Illness and Death

Obviously, the most desirable way to exit a Business is to Retire rather than die.

It's better to leave on your feet (rather than on your back)!

Many people have fixed ideas about when they would like to retire and sell their Equity in the Business (particularly if they have Business Partners who want to purchase their Equity).

To achieve their goal, they have to find an appropriate Purchaser who is prepared to ready, willing and able to pay the desired Purchase Price.

On the other hand, many people can't imagine Life after Business and envisage themselves "dying in the saddle".

If you're never going to Retire, it is obviously more important to have a Plan that deals with your Death (or an Illness that forces the Proprietor to exit the Business) (each of which could be an Involuntary or Insurable Event).

However, ultimately, you and your Partners need a Succession Plan for Retirement, Illness and Death.

 

Why Do You Need a Succession Plan?

The best way to understand the role of a Succession Plan is to imagine yourself in the situation where the disruptive or catastrophic event has occurred with respect to one of the Proprietors of the Business.

A lot of difficult questions will come up if one of these events happens.

It helps to have thought about these questions in advance, and to have some pre-agreed answers that are acceptable to all of the Proprietors.

 

Asking the Right Questions

Set out below are examples of the questions people ask when they think about a Retirement or Death in the Business.

List of Questions

Click here to read a more complete list of questions that might help you understand the need for a Succession Plan.

What Hat Are You Wearing?

The questions differ according to whether, when you think about the situation, you imagine yourself wearing a Purchaser's hat or a Vendor's hat.

The problem is that you never know whether you will be a Purchaser or a Vendor if one of the events occurs.

 

Wearing a Purchaser's Hat...

If your Business Partner died, would you like to be in business with their Spouse...or their children...or their Lawyer?

Click here to read more examples of the questions a Purchaser can ask.

 

Wearing a Vendor's Hat...

Would you like your Family to miss out on the value that you have built up over your life, just because when you died, your Partners couldn't (or wouldn't) pay the real value of your Equity in the Business?

Click here to read more examples of the questions a Vendor can ask.

 

What if I Don't Want to Take These Risks?

If the answer to any of the above questions is No, then you need a Business Succession Plan...

 

Retirement

Similar issues arise in the case of Retirement:

  • Would you be prepared to work longer, because your Partners can't or won't pay the real value of your Equity in the Business?

  • Would you accept a lower Sale Price?

  • If you're one of the Purchasers, how do you deal with the situation if the Retiring Partner wants an unrealistic Sale Price?

  • No matter what the Sale Price, how would you fund it?

  • What if you couldn't borrow the funds from your Bank?

  • What if the Bank isn't prepared to lend all of the funds?

  • What if the Bank wants security that you don't have or don't want to give them?

 

Avoiding the Problems

If you want to solve these problems before they blow up, then you need a Business Succession Plan...

 

The Purpose of a Business Succession Plan

The purpose of a Business Succession Plan is to pre-agree a strategy that will enable the Business and its Proprietors to deal with the exit of a Business Proprietor upon:

The legal framework of the Succession Plan is set out in a Business Succession Agreement.

A "What If Agreement"

You can probably understand from the above questions why many IGS Clients call their Agreement a "What If Agreement"!

It takes away all of the uncertainty about a What If Event!

"One Page, One Policy Succession Plan"

IGS is able to document a Complete Succession Plan for Insurable Events, so that all of the Cover required by a Proprietor is held on One Policy.

This strategy is called a "One Page, One Policy Succession Plan".

Click here to see an example of a "One Page, One Policy Succession Plan" for Insured Events.

 

Negotiating a Succession Plan

The above questions highlight the different perspectives people can have on Retirement and Death.

First to Die or First to Buy?

Unfortunately, in a business relationship, you never know whether you will be "the first to die or the first to buy".

Similarly, at the risk of perpetrating an even worse rhyme (!), when it comes to Retirement, you never really know whether you will be "gone tomorrow or having to borrow" (to pay out the Vendor).

Thinking as Both a Vendor and a Purchaser

Ultimately, it helps to place yourself in the position of both a Vendor and a Purchaser, when you think about a Succession Plan.

When you're the Vendor, you will negotiate diffferently to how you would negotiate if you were a Purchaser.

A Vendor wants to maximise the Sale Price, a Purchaser wants to minimise it.

So your expectations and how you would approach the negotiations depend on which hat you are wearing.

The chances are that your Partners would have the same expectations as you would in the same situation.

The Time to Negotiate and Agree

This makes for a problem if we wait for the event to arise.

If we wait, everyone will know which hat they are wearing and they will negotiate from that perspective.

If we negotiate a Succession Plan now, nobody knows whether they will be a Vendor or a Purchaser.

However, if we understand the legitimate expectations of a Vendor and a Purchaser, it makes it a lot easier to design an even-handed Succession Plan.

 

The Need for an Asset (or Buy/Sell) Strategy

An important component of this strategy is the need to sell the Business Proprietor's Asset or Equity in the Business.

Failure to document a strategy is a recipe for dispute, delay, expense and potential destruction of the Business and the wealth of the Proprietors.

Click here to read about the need for an Asset (or Buy/Sell) Strategy.

Other Asset Needs are discussed here.

 

The Need for a Liability (or Key Person) Strategy

The Asset (or Buy/Sell) Strategy is only one component of a Succession Plan.

In many cases, the Succession Plan might have to deal with Liabilities of or to the Business.

A Succession Plan might also have to address issues like:

  • the extinguishment or release of Personal Guarantees for Business Debt; and

  • the repayment of Loan Accounts.

These are Liability Needs that require a Liability or Key Person Strategy.

 

Different Types of Succession Plan

This website differentiates between:

Click on one of the above links to find out more about each type of Succession Plan.

 

Different Scope of Succession Plans

The difference between a Simple Succession Plan and a Complete Succession Plan is the extent to which the Succession Plan deals with other Succession Planning issues like:

To the extent that these issues are not addressed by the Succession Plan or the Business Succession Agreement, there remains scope for dispute, delay and expense.

If you retain your liability under any Personal Guarantees, then the Sale Proceeds and other assets in your Estate will remain available to the Creditor to satisfy the Debt of the Business in the event of a default.

 

Alternative Business Succession Agreements

IGS offers a number of alternative Business Succession Agreements:

IGS can use any one of the Agreements to document a Simple Succession Plan.

However, it uses either a Business Insurance Trust Agreement or a Hybrid Business Insurance Trust Agreement to document a Complete Succession Plan.

 

Identity of Policy Owner and Trustee

Self-Ownership Business Succession Agreement

If a Self-Ownership Business Succession Agreement is used, the Policy Owner will be the Life Insured personally.

A Trustee is not required for the Self-Ownership Business Succession Agreement.

Business Insurance Trust Agreement

If a Business Insurance Trust Agreement is used, the Policy Owner will hold the Policies as a Trustee.

The Policy Owner and Trustee is usually the Clients' Business itself or one of the entities within the Business Structure (preferably a Company).

IGS does not use an Institutional Trustee Company.

Click here to read about your choice of Trustee.

A Trustee is not required for the Self-Ownership Business Succession Agreement.

4 June, 2014 Adviser Alert:

Adverse SMSF Specific Advice re Super Buy/Sell Cover and Agreement

On 12 March, 2014, the ATO issued a private SMSF Specific Advice which effectively concludes that the practice known as “Super Buy/Sell” contravenes the Sole Purpose Test under section 62 of the Superannuation Industry (Supervision) Act.

IGS has always expressed concerns about this practice:

Click here to read more about the ATO Advice.

 

One, Two and Three Policy Succession Plan Worksheets

Click on the following links to see a Risk Analysis Worksheet completed for:

 

Fixed Legal Fees

The Fixed Fee charged by IGS depends on the choice of Agreement.

Click here to see the current Fees for all Agreements and Services.

These Fees apply subject to the Legal Fee Policy.

 

Free 20 Minute Teleconference

If a Client is uncertain whether to attend a Client Meeting or use the IGS Documentation Service, IGS offers a free teleconference (of up to 20 minutes) with the Client to explain the purpose and benefits of a Simple Succession Plan, a Complete Succession Plan and the "One Page, One Policy Strategy".

 

Copyright: Ian Gray Solicitor

 

 

Adviser Tip

A Complete Succession Plan is not just about Death, it's not just about Insurance and it's not just about selling your Equity.

See more Adviser Tips

 

 

 

 

 

Current Marketing Schedule

Current Marketing Schedule

Ian Gray travels to most capital cities regularly throughout the year and is available for Meetings.

Please click here to see his availability in Brisbane, Sydney, Melbourne, Adelaide and Perth.

Please contact us to arrange an appointment or teleconference.