Dynamic Business

Family businesses range from small start-ups to $500 million organisations. And with half of business owners expecting proceeds of sale to fund their retirement, succession planning is becoming an increasingly important issue. Below are some exit options for business owners.

Around 80 percent of Australian businesses are privately-owned, with a total value of $3.6 trillion. About 40 percent of business owners are planning to leave their business in the next five years. $1.6 trillion worth of family businesses will change hands as baby boomers retire over the next 10 years.

With half of businesses owners expecting the proceeds from the sale to be the primary funding source for their retirement, succession planning is fast becoming a major issue.

Ways to exit
The alternative ways to exit are:
1.    Succession of Ownership (to children or other family members).
2.    Succession of Ownership (partial or total management buyout or ‘MBO’).
3.    Capital raising (for those businesses large enough to withstand the cost and due diligence process).
4.    Merge with others.
5.    Sell as a going concern.
6.    Close and liquidate assets.

Appeal of different exit strategies
This is how business owners say they would like to exit:

•    Sell to a third party: 60 percent
•    Family Succession: 30 percent
•    Sell to management or staff: 10 percent

Succession planning
It takes careful planning and thought to achieve a graceful exit from your business, especially to someone you know. The succession plan outlines how the critical roles in the business will be filled. First, you need to know where your business is now, and where you would think it will be in the future.

The succession plan should deal with two main components: ownership succession or transfer of assets (transferring the wealth in the business to the designated successors) and management succession/transfer of power (management and control is transferred to the successor). This is appropriate when the owners want to retain ownership but reduce or relinquish their role in its management.

In the sale to a third party, both are transferred together.

Ownership succession
Because the proceeds from sale are likely to be an important part of owners’ retirement funds, they cannot afford to give away their businesses to their children. Whether or not the owner is transferring the business to family members, they usually want the value they deserve out of the business. A professional valuation is needed even if selling to family members. Your accountant can usually arrange this.

Where the owner chooses to take no further part in the business, and transfers both ownership and control to his or her family, there are a number of considerations:

• Seek outside professional help to navigate through the emotion that surrounds the process. An objective adviser can help resolve disputes and ensure that the decisions made are the best for both the family and the business.
• Hold a family retreat; a structured meeting with one or more generations.
• Write a constitution, prepared by your lawyer that covers a wide range of matters.
• Build in flexibility. The plan needs to be flexible enough to be changed if circumstances change.
• Family: The owner may want leave the business to the children but in most cases the children don’t work well together and arguments damage the business.
• Consider the structure. Select an appropriate legal structure.

It is important to provide for the ongoing, capable management of the business. Multiple classes of shares and shareholder agreements can be used to match the specific objectives of family members with their ownership rights.

Some specific techniques which can be employed include:

• Separate ownership from management interests: Different classes of shares can be issued to children not in the business which entitle them to dividends but not voting rights.
• Direct or restrict subsequent share transactions: Include provision to deal with a family members’ desire to sell their shares. Mandatory buyout of the shareholders’ interests, either through redemption or requirement to sell the shares, is a standard approach to handling this type of situation.