Business Succession Planning

The Business Succession Planning service is a project management and facilitation service where Complete Cover assists business owners to discuss and address business succession needs. A comprehensive questionnaire is provided as a starting point for discussions and by the end of the process business owners have addressed, and have clarity around, control of the entity under various circumstances, the rights of shareholders and an exit strategy for owners for voluntary and involuntary departure just to name a few. Feedback from previous clients has been that the most valuable part of this service is that it minimises the impact on the business operation and time commitment required of the owners in addressing fundamentally important issues which tend to fall in the ‘too hard’ or ‘not enough time’ basket.

Business Succession Planning overview

Business Succession Planning is simply a process of documenting the rights of, and agreed understanding between, business partners, shareholders and stakeholders. The value of this process, to the business, is that it sets up the ‘rules’ for dealing with the shareholders operational and structural issues. This creates stability for all parties and minimises the disruption to the business. Without any pre-agreement of issues allows for an ‘interpretation’ of rights with a potential for conflict. The Courts are littered with disputes between business partners (or their Estates), each having differing opinions of their rights and value in a business. These battles usually are extremely costly for each party. The costs are substantial monetary expenses to argue or defend the case in Court, as well as the interruption to management’s time and focus. These cases rarely end satisfactorily for either party. By going through the Business Succession Planning process, each shareholder has an opportunity to discuss and negotiate their position, to their satisfaction. This method provides a ‘friendly forum’ for negotiation. There is an expectation that all parties are willing to work through all the issues in a collaborative manner, rather than adversarial. This can saves tens of thousands of dollars and creates a much more satisfactory outcome for all concerned. In some situations no agreement is able to be reached due to the difficult nature or complexity of an issue. This does not mean that the ‘whole’ Business Succession Planning process should halt. It simply means that one particular point is not included in an Agreement until a resolution can be found. In any event, at least all the parties are aware that there is an issue unresolved. They can then decide whether to enter into or remain a part of the entity with their eyes wide open.

Key Objectives of Business Succession Planning

There are few businesses that have grown rapidly without planning and having clear objectives for their planning procedure, e.g. Business Plans, Marketing Plan, Advertising Plans, Operational Procedures. Most business advisers encourage all businesses, large or small, to adopt a ‘corporate’ approach and develop a more complete set of solutions to assist management and business owners. It is possible to use the Business Succession Planning process as a method of discussing the broader issues that affect a business and its direction. Discussing these broader issues can then be used as a platform for more meaningful planning and strategies between the stakeholders. Business Succession Planning takes on a similar planning development and covers a variety of objectives. At its most basic level, it deals with the rights of shareholders as they enter or exit the enterprise. These are generally documented as Buy/Sell Agreements or a Shareholder’s Agreement. A Buy/sell Agreement deals with the Voluntary (retirement) or Involuntary (death or disability) exits of shareholders from the business. A Shareholder’s Agreement deals with a full suite of shareholder, management and succession planning issues. It can also integrate the components of the Buy/Sell within the Shareholder’s Agreement if appropriate. Typically businesses adopt the Buy/Sell type of agreement at the early stage of the business lifecycle, usually to minimise start up expenses. Start up businesses can also consider the inclusion of the broader issues covered under a Shareholder’s Agreement as this compliments the other planning discussions. The benefit of investing time and energy into this often ignored aspect of business is the business focus and direction is known, and agreed to by all. This can only enhance and improve the performance and value of the business. This guide will assist each Stakeholder to identify some basic issues that could be addressed and assist in determining the most appropriate type of Agreement to be drafted. This is only a guide to assist in identifying the issues. A comprehensive questionnaire has been developed as part of the Business Succession Project Management Process.

Assessing what may be required in a Business Succession Plan

As previously mentioned, there are different types of Business Succession Plans that can be adopted.  The Plans are developed and supported by a legal Agreement that all parties are bound by and there are different types of agreements available.  This section will provide information that will assist you in determining the most appropriate alternative.

Where the business is not a Company, e.g. a Partnership, Unit Trust or Trust the agreement that performs the same function as a Shareholder’s Agreement are also known as Partnership Agreements, Unit Holders Agreements, Stakeholder’s Agreements or Joint Venture Agreements.

The principles for preparing the documentation are the same for all.

Shareholder’s Agreement

A Shareholder’s Agreement determines the rights of each Shareholder within a Company.  It also can include management and functionality procedures.  These Agreements deal with issues such as, how to acquire and dispose of equity, management functions and responsibilities, expenses, funding capital, valuation, exiting rights, dispute resolution.

These are the main issues that are dealt within a ‘Shareholder’s Agreement’ but obviously many more issues may be identified.

Buy-Sell Agreements

A Buy-Sell or Business Succession Agreement determines the method by which a Shareholder’s equity is dealt with in the event of a Death or Disablement (Involuntary Event) of a Shareholder

In some cases where there is no Shareholder Agreement in place, the exiting rights under a Voluntary Event such as retirement or the disposal of equity may also be dealt with in a Buy-Sell Agreement.

A well drafted Buy-Sell Agreement will be have put and call options included for the future disposal of the asset, as these circumvent the Capital Gains Tax issue of entering into an agreement of sale today on a future event.

Combining Agreements

The most appropriate agreement will depend upon each Businesses situation and may be determined by either structural or economic reasons.

Where the Agreements are combined they are usually termed Shareholder Agreements, but include the terms under which an Involuntary exit is governed.