The legal side of business succession: What you need to know

The legal side of business succession: What you need to know

With business succession such a hot topic among the corporate community at present, it's important to dig deeper into this area and see what it looks like practically.

Gone are the days when you could work until retirement and hand over to a talented and engaged family member who is primed and ready to launch into action.

The desire to take over the family firm is falling among university students that are potentially in positions to do so – succession intentions have dropped close to 30 per cent against earlier data, according to an EY global report. As such, the likelihood of you selling your business could be much higher than simply allowing the next generation to take charge. Even more so if you are in business with a partner or have other directors and shareholders.

Here are some legal angles to keep in mind.

1) Buy-sell and Exit agreements

For businesses with a small group of owners, succession can be a minefield. What happens if one person in the group wants to sell their share? Who gets to buy them out? Who will be the new business partner?  What if the ongoing shareholders don't want to work with the proposed new owner? How much is your share worth? What if you have a stronger connection to certain assets of the business? 

Right now, these might all seem like questions you can sort out at the time but when the situation arises, there is often conflict, selfishness and concern that most don't see coming. This is why buy-sell agreements and exit agreements are the way to go.

Co-business owners can use a buy-sell agreement to their advantage.Co-business owners should document their agreement now.

In short, these contracts set out the agreed path to take when parties wish to go their separate ways.  They can provide remaining shareholders or co-owners the first option to buy out the departing party before it's offered to a third party. They can address different assets and associated debt and what the process will be if there is a stalemate.  As a contract of this nature could theoretically be enacted at any time, there will be provisions that state how shares and assets are valued or appraised.

Buy-sell agreements and exit agreements are a smooth way to ensure your business carries on after you decide to retire – putting in place the key legal details necessary in a transition.

2) Estate planning – Wills and Funding Agreements

When it comes to wills and planning the future of your estate, many people consider their real estate, personal belongings and money as the most important. However, your estate is much wider than this and should include your business as well.

Business succession should be a core element of estate planning.Business succession should be a core element of estate planning.

You may have a buy-sell agreement setting out who has an option to buy your business interests in the event of your death. But what if the proposed buyer doesn't have the means to pay for them? They might be perfectly positioned to carry on the business alone, but without funding, how is your family going to reap the rewards of your life's work?

Your will and business succession plan go hand in hand.  Having your intentions in writing is crucial as clients of Oncore Legal have recently discovered…

How Oncore Legal Solutions can make a difference

Nothing in their wills addressed their business interests.

In 2015 our team met with co-directors who we'll call Joe and Steve. Joe and Steve operated a business together and also owned a number of properties as tenants in common and had their own self-managed super fund. There was joint debt on the business and the properties. The business was likely to fetch $3 million if sold on the open market. Steve ran the business on a daily basis and lived in one of the properties he owned and mortgaged jointly with Joe.

Joe lived interstate in another one of the properties with his wife, Janet. Janet had a chronic illness and required ongoing care. They both had adult children from previous marriages. 

When they came to Oncore Legal in 2015, Joe and Steve had simple wills leaving everything to their spouses and had very limited life insurance. Nothing in their wills addressed their business interests.  That meant that Janet would be left Joe's share in both homes and the business on his death – not an ideal situation given that she knew nothing about the business and was chronically ill. Janet would not be able to effectively manage a decision about the sale of her inherited share in the business or the house and the business could have been significantly impacted while an outcome was negotiated. Even worse, she could have sold to an unrelated party (if she managed to find one), creating further obstacles for the business and Steve, the surviving partner.

Fortunately our legal team, working closely with Oncore Wealth financial advisors, had considered several scenarios, thought laterally and had developed an effective succession strategy.

All their legal entities, companies, trusts, superfunds, joint and individual holdings were included in the succession plan along with an outline of how Joe's estate was to deal with each holding separately from a control and ongoing perspective taking into account the financial situation of both business partners and their families, assets types and liquidity needs.

Joe and Steve updated their life insurance and wills and signed buy-sell and funding agreements giving each other the option to buy the other out and detailing the process. The funding agreement detailed how the life insurance proceeds were to be applied. They also recorded binding death nominations with their superannuation fund for peace of mind as to how their death benefits would be paid.

Tragically, Joe passed quickly and unexpectedly in 2017 and Oncore Legal administered his estate. 

Effective prior planning relieved the business partners and family of very complex and heavy burdens.

Following the succession plan, the resident of each home bought the other out and the sale of the interest in the business to Steve was successfully funded by Joe's life insurance proceeds. Steve did not have to find the money or sell to a third party and Joe's beneficiaries have received a cash payment rather than shares in a business in which they do not wish to be involved.

Effective prior planning relieved the business partners and family of very complex and heavy burdens and successfully laid out Joe's wishes thereby reducing the risk of stalemates and claims on the estate.

Why choose Oncore Legal Solutions?

We understand that selling or passing over a business can be an emotional time. Often these enterprises have been developed from the ground up, and the amount of time and effort that has gone into these ventures is significant. This is why Oncore Legal Solutions are committed to ensuring succession is as smooth and stress-free as possible.

With the Oncore Legal Solutions team on your side, we can tailor a succession plan to your business – addressing different legal angles and putting your mind at rest.

If you would like more information about how our business succession/transition arrangements can support your future goals, feel free to get in touch with our expert team today – we look forward to hearing from you.