Succession plans that work

Whether you plan to sell, hand over or close your business, your goal should be to facilitate an easy transition with a minimum amount of stress for all parties involved.

Selling your business

If you have decided to sell your business,  you will need to decide the best time to sell it, how you will advise the relevant parties regarding the sale of the business and the best ways to negotiate and finalise the sale. Before deciding on a date for sale, ask yourself if your business is ready. Is it running efficiently with a solid cash flow and consistently making a profit? If not, what needs to happen for the business to become more profitable? What else can you do to make your business more saleable?

The value of tangible assets, plus the estimated value of any intangible assets, such as goodwill, determines the value of a business. Potential buyers will be happier to part with cash for a business if it will earn a decent return for them, after an  equitable salary for the owner has been deducted. The seller, meanwhile, having put much time and money into forming the business, seeks to recover time and cost outlays by asking a premium over and above the asset value of the business. This premium is usually labelled as ‘goodwill’ – the capitalised cost of taking over an established business with established suppliers, clientele, cash flows, trained employees and systems of operation, all things that won’t exist for a business started from scratch.

Making a plan

A sales strategy outlining the best way to advertise and conduct the sale is essential for business owners wanting to target the right buyers and maximise the sale price. Potential buyers could include suppliers, customers, competitors, management, family or other investors. Talk to your accountant about tax and sale issues and get a solicitor to draft up the sale documents or memorandum of sale. A broker or agent may also need to be commissioned.

Once the sale is agreed, a solicitor should draft and approve the sales document. Make final arrangements with an accountant about tax-related issues. Communicate with the bank regarding account closures, paying out debts or assigning any leases. before you are truly free of it, be sure to file any outstanding business tax returns and a final BAS. You may also need to wind up or cancel registration of company names.

Once a buyer is found, there are still a few things to consider:

Have you:

• Agreed on what will happen to existing staff?

• Completed a credit check on the buyer?

• Decided the status of warranty claims on goods and services sold before the sale is official?

• Decided if you will provide vendor finance?

• Signed a non-compete clause for a specific area or period of time?

• In the case of a franchise, contacted the franchisor to notify about the sale.

Once the business has been sold, there are other items that need to be done:

Don’t forget to:

• Disconnect telephone and power services
• Return any third party equipment (EFTPoS terminals)
• Cancel any business registrations
• File any outstanding tax returns.

Passing it on

More than 80 per cent of Australian businesses are family run. When it’s time to think about moving on, whether or not to keep your business in the family can be a big decision, particularly when it’s not clear whether a potential successor fits the bill to be a great leader. This could be because he or she lacks either the enthusiasm or know how to successfully take your business forward. Appointing such a successor risks the future of the business and, if you are relying on the business to fund your retirement, can seriously affect your quality of life as you get older.

For family businesses in which most of the family has been involved from an early age, the question of whether to consider only family members as successors is often simple. For these businesses, family members tend to have strong ties to the business. In other family businesses, however, often no one but the principal is involved. Family members are not expected to get involved and succession more readily occurs outside the business.

Some owners continue to have a say in the business well after they have passed it on and this may well see the business through for the short term, even with successors not really cut out for the job. But sooner or later, you will no longer be there to guide them and they will be left to run the business on their own. Thinking beyond your role in the business is essential for a valid and workable succession plan. Documenting how the business should carry on without you is the best way to ensure you leave a lasting legacy.

The wisest option is usually to nominate one successor, rather than several, but this is not always possible. Some owners successfully pass on their businesses to several of their children, nieces or nephews and have them share ownership equally. If you have more than one successor in mind, ensure they have a similar vision for the business and are all just as committed to seeing it succeed.

Defining roles within the business can minimise the potential for disputes, as can having an independent board of directors and a formal dispute resolution policy in place.

Closing it down

The decision to close down a business is not an easy one when its founder has invested so much time and energy into seeing it succeed.

Accepting that you will receive no funds for the goodwill built up in your business, and no additional return for the hard work and capital you have invested into it, can be a challenge. Seeing your business as having served its purpose well over its  lifetime can help as you prepare to wind it down.

Closing down is a decision usually made when a business owner decides the business is not saleable – either because it isn’t profitable or because it relies almost entirely on its founder for its successful operation.

Regardless of the reasons, a final date must be chosen for it to close and the business owner should decide when and how to inform staff, suppliers and other relevant people. To make a clean break, any business assets such as equipment and inventory should be sold before winding up. Customers, suppliers and competitors may well be among the buyers of any saleable items on offer and there are several ways for the sale to occur, including an auction, through an agent or on eBay, for example. There may be tax implications for selling assets, so be sure to seek advice from your accountant.

Settle your debts

All liabilities also need to be paid out. These might include trade creditors, staff (wages, superannuation, long service leave, annual leave and redundancy), tax (GST, PAYG, payroll, income and capital gains) and any existing loans or leases with  financiers. You may need to investigate whether penalty clauses apply if leases or loans are paid out early.

Westpac continues their long-term commitment to franchising in Australia. The bank has a national network of franchise specialist business bankers who are able to deal with the specific needs of the franchise sector.

Westpac also runs a series of financial education webinars and online courses on a wide range of topics including succession planning. Details of the next webinar can be found at www.davidsoninstitute.edu.au

Labrina Tsekouras is the Westpac Senior Business Development Manager for Victoria and Tasmania and specialises in the franchise sector.

Contact Labrina at:

P: 0418 246 903
E: ltsekouras@westpac.com.au
W: www.westpac.com.au