Succession Planning – Why is it so Important?

Sharp Accounting’s Glenn Sharp & Ewen Fletcher talk about why business succession planning is so important.

You might not like to think about it, but one day you will inevitably need to leave your business.

Whether it’s to retire, to move on to something else, a partnership dispute, or for health reasons, a succession (or exit plan), outlines the things you will need to do to sell, close or transfer ownership of your share in a business.

Getting your business and finances in the best possible order is a significant part of a succession plan. Unfortunately, a lot of business owners do not plan for an exit or succession and just hope for the best.

To get the best possible outcome, you should undertake a financial review and plan an exit. To do this, you will need to consider the following:

The current value of the business

You will need to determine the current market value of the business by looking at market conditions, financial statements, physical assets and even intangible assets, like your business reputation or goodwill. This will help identify the gap between the current value and the value required upon exit (or what we call the Business Valuation Gap).

Retirement income or payments

You should explore any retirement payments or sale proceeds. Alternatively, a payout agreement and whether it’s a one-off payment or regular payments.

Sale details 

Work out the sale price you want or need to achieve. If you are in a partnership and want a buyout, work out the value of your share in percentage terms. If there is a major gap between what is needed and the current value, then work out a plan that closes the gap between the current value and expected value.

Taxation

Seek advice before accepting any offer so that you are aware of any potential taxes payable upon exit. Structuring the sale correctly can save significantly on the tax payable on the sale.

Consider insurance requirements, such as run-off cover, where you are insured for legal claims made after you sell the business and consider whether Capital Gains Tax or GST applies to the sale or transfer.

And make sure you set realistic and measurable milestones to ensure your succession plan is achievable. A good succession plan will help your business transition smoothly to the new owner. Effectively planning your exit will ensure you maximise the value of your business and help keep it running well into the future.

Find out more information about succession planning on our website here.