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Business Succession Planning:

Business Succession Planning

Need for Succession Plan

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Simple Succession Plan:

Simple Succession Plan


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Complete Succession Plan


Financial Needs

Insurance Funding

Retirement Funding


One Page Strategy:

One Page Strategy

Asset Needs

Liability Needs

Personal Needs

Who Pays the Premiums?

Valuing the Business

Simplifying the Valuation Issue

Equity vs. Loan Capital


One Policy Strategy:

One Policy Strategy


Dual Role of Personal Cover

Dual Role of Debt Red'n Cover

Security & Tax-Effectiveness

Cost Savings

Pre-Agreed Purchase Price

Apportionment of Premiums

Methods of Aggregation


Multiple Policy Approach:

Multiple Policy Approach

Super Fund Ownership

Tax Disadvantages

Cost Disadvantages

Other Disadvantages

Geared Premium Funding

Super Buy/Sell


One Page, Two Policy Strategy:

One Page, Two Policy Strategy


Other Issues:

Tax Deductibility

Inadequate Insurance Proceeds

Vendor Finance

Changing Needs

Future Growth of Equity

Trauma Buy/Sell Strategy


Sole Proprietors and Families:

Sole Proprietors and Families


Family Ownership

Sale Strategies

Third Party Buy/Sell Strategies

Estate Equalisation Strategies

Family Buy/Sell Strategies

Second Generation Strategies

Debt Reduction Strategies




Family Ownership Issues


This topic deals with the implications of whether any family members wish to retain ownership of the Business after the death of the Proprietor.


When are Family Ownership Strategies Relevant?

Family Ownership Strategies are relevant to two alternative scenarios:

  • no family members or Beneficiaries wish to retain the Business; and

  • some or all of the family members or Beneficiaries wish to retain the Business.


No Beneficiaries Wish to Retain Ownership of Business

If no spouse or child wishes to retain ownership of the Business, then it is likely that the death of the Proprietor would trigger a sale of the Business.

Because the sale would occur after the death of a key person, any Purchaser is likely to argue in the short-term that the goodwill has been reduced by the loss of the key person.

As a result, they will try to acquire the tangible assets of the Business at a fire sale value.

Temporary Retention By Beneficiaries After Death of Proprietor

One response to this risk is for the Beneficiaries of the Estate to retain the Business in the medium term, so that they can prove that there has been no reduction in the goodwill.

After successfully trading, they might even decide to retain ownership of the Business and not sell it.

Sale to Third Party Before Death (i.e., After Proprietor's Retirement)

Another, perhaps preferable, option is for the Proprietor to make a decision about the most appropriate stage of their life to effectively retire and sell the Business to a Third Party in an orderly manner.

In order to achieve the optimum value for the goodwill, the sale should occur when the Proprietor can still remain involved in the Business as a consultant, so that they can help maintain the value of the goodwill that the Purchaser is being asked to pay for.

This option should allow the Proprietor to fund their living expenses during retirement and distribute any surplus cash or investments equitably to the Beneficiaries of their Estate upon their death.


Some Beneficiaries Wish to Retain Ownership of Business After Proprietor's Retirement or Death

If there are children who wish to take over responsibility for the Business, this raises questions as to how and when management control and ownership should be transferred to the interested children.

Planned Retirement

The ideal outcome is for the Proprietor to fund their retirement without needing to access the capital or income of the Business.

This strategy requires the Proprietor to have sufficient superannuation, investments and cash to fund their living expenses in retirement.

This means that the Business:

  • does not need to be sold; and

  • can be transferred tax- and cost-effectively to the Second Generation through the vehicle of the Proprietor's Will.

Even if this strategy is available, it might still be necessary to consider some of the Estate Equalisation Strategies discussed below.

Financial Obstacles to Retirement

One obstacle that prevents or delays the retirement of a Proprietor is the lack of sufficient superannuation, investments and cash to fund the Proprietor's living expenses in retirement.

Ideally, the Proprietor should progressively distribute or pull profit out of the Business and invest it in superannuation, other investments and cash.

In the context of rural business succession, these investments are often referred to as "off-farm assets".

However, rural businesses are a good example of how fluctuating business conditions can make it difficult to regularly pull sufficient profit out of the Business to fund a retirement.

This often results in the Proprietor having to retain the ownership and profits of the Business, because they cannot afford to retire otherwise.

In other words, Dad cannot afford to "get out of the saddle".


If this problem can't be resolved, then the Proprietor might have to:

  • retain ownership until they die;

  • adopt one of the following transitional income strategies;

  • sell the Business to the children upon their retirement or during their lifetime; and/or

  • sell the Business to a Third Party upon their retirement or during their lifetime.


Transitional Income Strategies

Transfer of Management Control Only

One option is for the Proprietor to retain ownership until their death, but to transfer management control to the interested children in the meantime.

Under this option, ownership would ultimately be transferred to the children under the Proprietor's Will.

However, retention of ownership means that the Business must fund both:

  • the salaries of the children in their management capacity; and

  • an appropriate profit or return on capital for the Proprietor.

If this is feasible, the Proprietor can structure incentive payments to reward the creation of "super profits" over and above the level of profit that might otherwise have been generated.

Transfer of Business Separately From Property or Farm Freehold

A variation of the above option is for the Proprietor to transfer the active elements of the Business to the interested children, but retain ownership of any underlying Property.

The purpose of retention of the Property is to allow the Proprietor to:

  • lease the Property to the children; and

  • fund their living expenses out of the rent.

However, in the case of a farm, the substantive Business might not have any significant value apart from the Property.

The financial viability of this strategy depends on:

  • the level of the rent; and

  • the ability of the children to fund both the rent and their own living expenses out of the income of the Business.

It might not be practical if the farm income is not high enough or regular enough to commit to a fixed rental cost.


Sale Strategies

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Copyright: Clover Law Pty Ltd



Adviser Tip

In the case of Retirement, a Complete Succession Plan can pre-agree the Purchase Price and specify a timeframe for payment.

If you do not have adequate insurance for an Insurable Event, your Succession Plan can specify a timeframe for payment of the shortfall.

See more Adviser Tips


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