How does a business succession plan work?
The key function of a business succession plan is to mitigate the risks involved in the handover of a business should one or more stakeholders leave in unexpected circumstances. It does so by outlining the legal interest each owner has in the business, and valuing the business as a whole. Different business structures will have different business succession plans, outlined as follows.
Sole trader: As the term suggests, it is a business operated by a single individual. Succession in this case is very straightforward, as the owner is solely responsible for their assets, debts and liabilities. These can be outlined in the owner’s will or power of attorney and passed onto their beneficiaries. It is also good to include a clause that determines what must be done should the beneficiaries have no interest in running the business.
Partnership: This refers to the type of business that is run by a group of people that distribute income and debts between themselves, such as a family business. In such cases, estate planning lawyers in Melbourne will recommend setting up a partnership agreement right at the setup stage of the business that outlines a business succession plan. In the event of death or departure of one partner, their assets and liabilities can simply be distributed between the other partners and settled within the business, without any third party intervention.
Company: This is a more complex business structure usually operated by individuals that hold shares in the business, but the company itself acts as a separate legal entity. In such an agreement, you can pass on any shares you hold in the company as part of your will, but not any assets that come under the company name. However, other shareholders may also want to buy your shares after your departure, and there is also the question of who succeeds your own place in the company.
Clearly defining succession of ownership is important to make sure all assets and liabilities are passed onto beneficiaries who can deal with them responsibly and avoid long settlements in courts after your passing.
Properly valuing your business
Doing a proper valuation helps establish how much your business is worth and is essential to creating a business succession plan. This can be done in a variety of ways: looking at current market values in the industry, return on investment, the total value of all assets of a business, or the future profit margins. These are especially important factors to consider as the sudden departure of an owner can have adverse effects on the revenue of a business.
When you consult estate planning lawyers in Melbourne to lay out a business succession plan, they can help you determine the financial cost to the business should a particular owner leave suddenly. This lays out a path to the distribution of equities, and business capital to settle any debts or loans that are yet to be settled.
As with any document like a will or power of attorney, it is important to keep your business succession plan regularly updated. Even if circumstances change over the years, your business assets should be able to pass on smoothly when the time comes or in unexpected circumstances.
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