Business Succession Planning Manual

  • Put and Call Option Agreement

  • $320 incl. GST

  • In a Put and Call Option, the Owner can force the Purchaser to buy his Asset (Put Option). Similarly, the Purchaser can force the Owner to sell the Asset (Call Option). If neither the Owner nor the Purchaser exercises their Option then the sale never takes place.

    Under the Call Option, the Purchaser may exercise the option to require the Owner to sell their Asset to the Purchaser. Under a Put Option, the Owner may exercise the option to require the Purchaser to purchase the Owner’s Asset.

  • Bare Trust Deed

  • $660 incl. GST

  • You may feel vulnerable in the public and reporters knowing what land you own. It is no one's business, other than yourself, and the ATO, of course. You transfer your real estate to a bare trustee for no stamp duty or CGT. When someone does a search at the local titles office your name does not appear anywhere.

    Before the Bare Trust is created the beneficiary is both the legal and equitable owner. Therefore, there is no trust in existence since the 'legal owner' and 'beneficiary owner' are the same person. In other words, the beneficiary, before this Bare Trust is signed owns both the 'legal' and 'equitable' interest in the asset.

  • Unitholders Agreement

  • $440 incl. GST

  • A Unitholders Agreement is an agreement between unitholders and the Unit Trust trustee. It overrides a Unit Trust Deed. It sets out how the unit trust is managed. They are similar to a Shareholders Agreement.

    Unitholders’ Agreements manage the behaviour of unitholders in a unit trust.

    Unitholders’ Agreements are cost-effective.

  • Shareholders Agreement

  • $245 incl. GST

  • A Shareholders Agreement is a contract between shareholders. It protects the shareholders’:

    1. relationships with each other
    2. other business arrangements
    3. rights
    4. responsibilities, obligations and liabilities
    5. interests

    A Shareholders Agreement is a binding contract between shareholders. It sets out their rights, obligations, and procedures. This is in case of shareholder dispute in the future.

Business Succession Planning – Buy/Sell Agreements

The importance of Business Succession Planning: there are approximately 2 million small businesses in Australia. Many such businesses operate with more than one owner who together may manage the small business. An owner may die or suffer from a disability and be unable to continue to work in the business. The other owners may not want the ‘outgoing’ owner’s family to be involved in the ownership and ongoing management of the business.

To deal with these possibilities, the owners can agree together what will happen if one of the owners dies or is disabled. Such a succession plan can require the other owners to purchase and the ‘outgoing’ owner to sell his or her business interest when the death or disability occurs. When an owner becomes so incapacitated, a question arises how the other owners can fund the purchase. Obtaining funds to purchase the outgoing owner’s interest in the business may be difficult, especially if the death or disability was unforeseen. While some owners may have sufficient money to fund the purchase others may wish to take out life and other insurances.

Lack of Business Succession Planning – an example of a Buy/Sell that never happened

Julio and Wendy, have two children. Julio (55) is in partnership with his good friend Peter (32). Together they run WestParts. It makes great machine parts. Peter does all the sales. Julio is the technical boffin. They make a formidable force. After 7 years of hard work, and frugal drawings the business is worth $5.4 million on the open market.

At 11:30pm on Tuesday Julio suffers a stroke and collapses on the factory floor. He is bed ridden. Months pass. The business is losing money. Peter can’t afford to hire someone to replace Julio (Julio still draws his usual salary!). Peter wants to buy out Julio’s interest in the business. But Peter and Julio can’t agree on what the business is worth. Why bother working out the value? Peter has no money. Unlike Julio, the bank already had a business mortgage over Peter’s home.

Julio dies 4 days later leaving all his assets – including his interest in WestParts to Wendy. Julio’s funeral is still two days away but Peter is already in trouble…

WestParts borrowed $1,750,000 to purchase a warehouse in South Yarra. There is an additional bank overdraft of $945,000. Julio and Peter personally guaranteed both debts. The bank manager is on the telephone. Julio’s death is a “default” under the overdraft. The bank manager demands full payment or for Peter and Wendy to renegotiate the loan. The bank manager asks: “Will Wendy mortgage her family home?” As if!

*  The firm has lost one of its biggest assets – Julio’s technical knowledge. Peter is desperately looking for someone who can fill that role. But how will the business pay the salary?

*  Wendy can’t help run WestParts – she is trying to bring up two children without a Dad. Wendy’s relationship with Peter is souring. Peter wants to stop paying Julio’s usual salary. ‘That is blatant and cruel theft’ cries the grieving widow.

Peter is eventually able to re-finance the two loans at a higher interest rate. He finds Rod. Rod has the required technical knowledge. Rod costs a fortune. Errors made before Rod gets up to speed result in the loss of the firm’s best client.

Peter takes on further debt to keep the business afloat. Desperate, Peter tries to sell his share of the business. The offers are only a fraction of what the business was worth before Julio suffered the stroke. Grimly, Peter struggles on.

WestParts folds. Peter goes down with the business. He loses his family home.

The business, for Peter and Julio, was not only their job but also their life and retirement money. Now it won’t even provide Peter’s family with a roof over their head.

You can read Dr Davies thesis on Business Succession Planning.

Business Succession Planning where there is only one owner

Sole proprietors – single owners – have even more reason to enter into documented and insurance funded Business Succession Plans. These are often put in place with employees and competitors. They have a side effect of increasing employee loyalty.

Why should I plan for Business Succession?

What happens if you become disabled, suffer a stroke, go bankrupt, go to jail, divorce or die? Will you:

  1. retain your business interests for your family; or
  2. sell and relinquish your interest to your partners, key employees or a stranger?

You can choose to ignore the opportunity to plan your own succession. (After all, perhaps you will never die, get sick or suffer an accident.)

The result of your failure to plan? You are leaving your business susceptible to forces that may cause it to self-destruct. This is “business euthanasia”.

You had the vision and ability to build your business from nothing. Do you have the courage to face the challenges of the future?

Would you strive to make more sales and sign more contracts if you knew that within 24 hours of your partner’s death your business shares your partner’s demise?

Why document a BSP?

  1. gives your business every chance of survival when you are gone
  2. ensures your family and yourself receive true value after tax
  3. allows for an orderly transition of ownership – rather than forcing a fire sale
  4. provides a ready market for your business interests
  5. retains key employees
  6. reduces or eliminates Capital Gains Tax, Income Tax + Stamp Duty

Where do my partners find the money to buy out my interest?

After you agree to the terms and conditions in writing you need to decide how the remaining partners will pay you for your interest in the business. Few people have cash reserves or available credit to make such a purchase, especially when the business is already hurting by the absence of a key interest holder.

The safest and usually most cost-effective answer is to use insurance proceeds. There are 3 types of insurance that you should talk to your Adviser about:

  1. Life Insurance (if you die)
  2. Trauma (if you suffer an event like a heart attack, stroke or cancer)
  3. Total and Permanent Disability (if you lose a limb in an accident or similar) You may be able to qualify for all 3 types of insurance.

Sadly such events as your resignation, bankruptcy, divorce or retirement often can’t be funded with insurance proceeds. Other less successful methods of finance should still be considered.

Shareholder Agreement vs Business Succession Plan

You need separate agreements for each of these situations:

1. A Shareholders Agreement is a contract between the company and the shareholders. It overrides a company Constitution. The agreement details how the company is managed. (It is similar to a Unit Holders Agreement.)

2. A Business Succession Plan is an agreement to get rid of the disabled or dead owner with some money. The outgoing owner gets some money and the remaining owners get his interest in the business. A BSP does nothing to help the business itself. The business may well fold after the person leaves, but at least his wife gets some money and the remaining owners get the business. A BSP is usually funded by life, TPD and trauma insurance.

3. Key person insurance agreement is insurance paid to the business if a key person is disabled or dies. This does not deal with how to get the shares off the outgoing owner. Key person insurance just helps the business. Key person insurance is usually to repay debt (often secured by the outgoing owners’ home) or cover the cost of training up a new person.

Is my Adviser the Project Manager?

Yes, your adviser’s role is one of project manager. Your financial planner brings all the key people to the table if and when their expertise is required.

Your adviser works as project manager ensuring work is done and deadlines are met.

As a private taxation law firm please have your financial planner or accountant contact us regarding Business Succession Planning.

Adjunct Professor, Dr Brett Davies,  CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
Head Office: 39 Stirling Highway, Nedlands, WA
Mobile:           0477 796 959
National:      1800 141 612
Email:            [email protected]
Skype:           brettkennethdavies

See also:

Five Business Succession Planning trusts in Wills:

1. 3-Generation Testamentary Trusts – reduces CGT & stamp duty
2. Superannuation Testamentary Trust – reduces the 17% or 32% tax on Super going to adult children
3. Bankruptcy Trusts – if a beneficiary is bankrupt
4. Divorce Protection Trust – if a child separates stops the Family Court taking your money
5. Maintenance Trust – if beneficiaries under 18 or vulnerable

See also:

Succession Planning in a Family Trustbusiness succession planning

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