Small to medium sized enterprises (SMEs) represent over 97.5% of all businesses operating in Australia. SME’s are responsible for creating around 7 million jobs domestically and nearly 60% of Australia’s GDP is contributed by SME’s. These are big numbers that matter. SME’s are the arterial lifeblood of the Australian economy, and represent a significant core of Australian wealth. Notwithstanding the significance of these numbers, the Australian Bureau of Statistics estimates that 75% of SME’s do not have a Succession Plan in place.
Succession Planning involves strategic planning towards two key outcomes; 1) the controlled exit from the business of a key person or persons where 2) the value of the business has been maximised. Exit scenarios could include retirement, trade sale, transfer to the next generation or the premature death or disablement of a key stakeholder. The bigger the business, the bigger the stakes. A business with multiple owners, family groups and wealth behind it will raise the stakes even higher.
A key tenet for any Succession Plan is to document it. If your Succession Plan is in your head, it doesn’t count and it won’t stack up in court should there be a dispute or a challenge after the fact.
The next core tenet is to seek professional advice. The core Succession Planning advice team should include a financial planner, an accountant, and a lawyer.
The starting point will be to ‘begin with the end in mind’. By establishing what needs to happen, structured strategies can be put in place ahead of time that will steer towards desired Succession outcomes i.e. so that the right assets go to the right people at the right time.
A well-structured Succession Plan will cover both planned and unplanned exit scenarios. It will also consider crucial considerations around tax planning, structures, asset protection and Estate Planning.
Consider retirement or a trade sale; many business owners view their business as their ‘superannuation’ i.e. they see their business (often their life’s work) as the key asset that will ultimately fund their retirement. The realisation of value, and sale of their business equity (either to market or to the remaining owners) will constitute a capital gains tax event, and a likely tax bill. There are Small Business Capital Gains Tax (CGT) Concessions that can significantly reduce the tax bill where eligible, and which also allow business owners to boost their retirement savings in the concessionally taxed superannuation environment in certain circumstances.
The next question is how those savings are invested towards overall retirement goals so as to mitigate longevity risk i.e. the risk that you will outlive your savings. The four core principles behind investment portfolio construction are Asset Allocation, Cost, Risk Management and Liquidity, and where professional financial advice is key. A starting point will be to identify your ‘investment personality’ i.e. your individual preferences around risk versus return, and understanding the different types of investments and structures available to you (from the simple to the complex).
Self Managed Super Funds (SMSFs) are very common with business owners, as is the prevalence of Australian Shares and commercial property in those SMSFs. Considering that the Australian economy represents less than 2% of the global economy, this is where the diversification conversation needs to be had around asset allocation. Strategic planning considerations should be afforded to mitigate against what can become a ‘liquidity trap’ inside an SMSF i.e. where the illiquid nature of property assets can become a burden to the fund (where liquidity is required to meet future cashflow obligations).
Life insurance can provide a security blanket under the financials of the business if the unexpected happens e.g. a premature death or disablement. Financial breathing space matters greatly in sudden situations like this. Professional financial advice is crucial to avoid nasty tax or policy definition surprises at claim time. Life insurance can also be used as both the trigger event (i.e. the claim payment) and the funding mechanism for a buy/sell agreement where there are multiple business owners. Other options of course are vendor finance arrangements, or bank finance. It is crucial that agreements such as these are carefully documented, and that advice is provided around structures, tax and asset protection,
A shareholders (or partnership or unit-holders) agreement should be a non-negotiable for every business with more than one owner. Typically providing the governing framework of the day-to-day operations of the business, a properly constructed shareholders agreement (SHA) will also provide guidance around an agreed valuation methodology. This is a very important detail for all exit scenarios and provides each business owner the benefit of being able to plan ahead with regards to retirement, tax management and estate planning. The SHA will also cover off on key items such as the offer of first refusal (i.e. first rights of purchase to the remaining shareholders), and in the case of larger businesses – drag and tag clauses to protect the rights of majority and minority shareholders respectively. The buy/sell agreement will be an extension to the SHA.
Lastly, with two things certain in life; death and taxes, it’s amazing how much time, care and attention we pay to taxes (we had a whole election in Australia that hinged on taxes in 2019!), but we don’t ordinarily afford the same level of attention to personal Estate Planning. If one were to pass away without a valid Will in place, the intestacy laws apply and the Public Trustee steps in and takes control. It is also important to note that Family Trusts and SMSF’s/ Superannuation are non-Estate assets i.e. their assets don’t get captured by instructions in the Will and professional advice should be sought to address this.
It is true that all Estates can be challenged, Will or no Will. We live in a world where blended families and having wealth spread across multiple entities is the norm. A worthwhile question to ask is; what assets should go through the Estate (i.e. so that they deliberately get captured by the Will) and what assets should deliberately bypass the Estate (i.e. it’s very hard to challenge something that’s not part of the Estate). Remember, it is about making sure that the right assets go to the right people at the right time.
Enduring Powers of Attorney and Guardianship are also very powerful estate planning tools for scenarios where people lose the ability to make financial and medical decisions for themselves.
A final word; as with anything in life, what matters most is having the right people behind you. A Succession Plan has more chance of being bulletproof and watertight on the back of seeking professional advice.
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Naomi Mee-Martino CFP® is a Financial Planner and Partner with Bastion Financial Group.
Bastion Financial Group specialises in investment management and holistic financial planning advice to high net worth families, professionals and business owners. We utilise asset allocation, proven research based methods, a focus on education and decades of experience to help clients minimise the risk and stress of creating and managing wealth. We are Certified Financial Planners and active members of the Financial Planning Association of Australia (FPA). Our Advisory team can be contacted on;
Naomi; naomi@bastionfinancialgroup.com.au or (08) 6225 5150 or 0413 917 698
David; david@bastionfinancialgroup.com.au or (08) 6225 5150 or 0407 770 782
Important information
This article has been prepared by Bastion Financial Group Pty Ltd., Authorised Representative(s) of Godfrey Pembroke Group (ABN 38 078 629 973), an Australian Financial Services Licensee, registered office at Level 2, 26 Brisbane Avenue, Barton ACT 2600.
Any advice in this document is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal financial, tax and legal advice prior to acting on this information.
Opinions constitute our judgement at the time of issue and are subject to change. No member of the Godfrey Pembroke Group, nor their employees or directors, gives any warranty of accuracy, nor accepts any responsibility for errors or omissions in this document.
