August 10, 2023 By Troy Furness

Generational Business Succession Planning - What you need to know


Have you ever pondered the long-term succession plan for your business? Succession planning goes beyond TV dramas or billionaire families; it's about navigating the transfer of your hard-earned legacy while maximising the value for you and those who matter most.

Business succession planning is essential to any business, but is particularly important to Australia. As our population ages and the economic forecast continues its rollercoaster ride, planning for future transitions will help you steer your business with clearer vision, even amidst the fog of uncertainty. Trust us, it pays to think ahead. With the right plan, you're not just guessing at what's next—you're charting the course. So, let's roll up our sleeves, dive into the nitty-gritty, and get ready to future-proof your business together!

Generational Succession Planning (Your Family Legacy)

Navigating the important aspects of generational succession planning in a family business can seem like uncharted waters. It encapsulates:

  • The transition of business operations to future leaders
  • The transfer of business ownership to your family members
  • The development of a comprehensive succession strategy
  • The shift from a business-oriented family to investment-focused individuals

To ensure successful generational succession, clear communication is imperative. Often, failure in planned transitions to your new business partner/ family member occurs when formal succession planning is delayed until necessitated by external events or retirement.

Keeping the 'legacy' alive and kicking involves more than just a dream. A winning handover happens when the all-important pillars of governance, family guidelines, shared values, dispute resolution, as well as succession and estate planning, have been ticked off the checklist before turmoil throws a spanner in the works.

Ordinarily, generational succession involves redirection of business interests to the next, possibly younger, generation and future leaders. This tends to feel more like nurturing a family within the business as opposed to simply running a family business.

To give you some perspective, one-third of Australian family business owner anticipate that the next generation will assume majority ownership within five years. However, a mere 25% of these businesses have a robust, documented, and widely communicated succession plan, a stark mismatch revealed by the PWC Family Business Survey.

Methods of transferring business interests vary widely, typically centering around the gradual transfer of equity in the business over a specified time period or at a predetermined point. Consideration for the equity transferred could include monetary payment or be addressed ultimately through estate planning.

Navigating the pathways of generational succession need not be overwhelming - we're committed to guiding you every step of the way with expertise and genuine empathy, crafting a future that maintains your unique business flair.

Generational succession comes with its own set of issues that need to be dealt with:

  • Capability and willingness of the next generation

  • Capital transfer

  • Managing remuneration

  • Who has operational management and control?

  • Transition timeframes and expectations

  • The need for greater formality and management structure

Assessing the Next Generation's Capacity and Eagerness

Succession within the family businesses often feels similar to walking a tightrope. Juggling various factors, the aim is to uphold the business's performance post-transition. What furthers their complexity, is ensuring the next generation's competence and willingness to take the helm. Undeniably, the older generation's endeavors to sustain the business within the family, establishing their enduring legacy, and creating a stable business landscape for the successors are admirable objectives. However, these well-meant intentions must be coupled with the next generation's abilities and ambition. Promoting open discussion, conveying expectations, and ensuring alignment with the successors' aspirations is pivotal in this scenario.

Father and son at work looking at business performance reports

The Art of Capital Transfer: Striking a Balance

The outgoing generation's capital requirements are another critical consideration during a generational transition. A primary reflection here is determining the extent of capital extraction from the business that aligns with your financial needs and the business’ sustained profitability. Remember, the higher the demanded capital during transition, the greater pressure it exerts on the business as well as the equity stakeholders.

Commonly, the incoming generation may lack sufficient capital to facilitate a complete buyout of the outgoing generation. The result? A commitment from the previous generation to an ongoing investment in the business, or alternatively, the business undertaking an increased level of debt. Understanding the sustainability of such scenarios at both the shareholder and business level is imperative. In special circumstances, a fully agreed-upon timeline for transitioning ownership may present itself as the most feasible approach.

Managing Remuneration: Fair Is the Only Way to Play

In many small and medium businesses, an intriguing trend is noticed regarding the subject of remuneration. Owners establish their earnings from the business purely based on their requirements, often not considering the reasonableness of compensation in the context of roles they undertake. This can result in the business overpaying or underpaying the personnel involved. To ensure fairness all around, formalise the compensation structure. This means aligning remuneration with roles, and if performance incentives are in place, these should be outlined clearly and comprehensibly.

Being at the Driver's Seat: Operational Management and Control

The transition of operational and managerial control is inevitably a sensitive area. Establishing guidance on maintaining and transitioning power of control is a necessary measure that is vital not only for stakeholders involved but for the business as a whole. Oftentimes, exiting business owners believe the business should continue operating as it did under their watch.

However, such considerations can lead to an environment of uncertainty that can manifest as confounding decision-making or create a power vacuum that adversely impacts the business. Addressing such issues in time is essential. Establish the transition of control upfront on a mutually agreed timeline, and the process will be significantly less antagonistic.

Timeframes, Expectations, and the Succession Journey

An essential understanding to have within generational transition is that it's a process and not a one-off event. An extended timeframe for transition is often mandatory, requiring active management of mutual expectations to steer clear of derailments brought on by frustration or disgruntlement.

Formality and Structure: Strong Foundation

A point of concern for several small and medium-sized enterprises (SMEs) is the blurring of lines between the roles and responsibilities of the board, shareholders, and management. The advent and evolution of generational succession often exacerbate this ambiguity. Thus, establishing formality in these structures, clarifying roles, and transparently communicating mutual expectations is critical.

To avoid disagreements and miscommunications, the consensus might be reached over a document, potentially a family constitution—an agreed-upon set of rules. Alternatively, an external advisory group could guide the family to ensure a balanced perspective is involved in the decision-making process. The crux lies in setting clear boundaries, executing defined roles, and driving a more structured, transparent, and efficient form of management.

Father teaching son the ropes of his trades business

The Role of Business Valuation in Succession Planning

Succession planning is a critical facet of any robust business strategy, and an accurate business valuation is an integral part of that strategy. As clearly put by Benjamin Franklin, “By failing to prepare, you are preparing to fail.”

Smart business valuation and strategy holds the key to effective succession planning because:

  • Gives a Reality-Check of Your Business Worth: While we're all busy driving growth and steering the company towards bigger achievements, we might lose sight of our business's real worth. A properly done valuation pulls us back into the reality of our business value, making sure our hopes aren't deflated or inflated.

  • Facilitating the Financial Transition: For incoming successors, gaining a deep understanding of the company's worth can prove invaluable when securing appropriate financing for their acquisition. Lenders, such as banks, usually base lending decision

  • Estate Planning Considerations: A business valuation is paramount to prudent tax planning and to guarantee a fair distribution of assets among heirs, notably in family-owned enterprises. It's worth considering that, according to the Family Business Institute, 70% of family-owned firms are sold or fail before the second generation has an opportunity to take command.

  • Buy-Sell Agreements: If you're in a business partnership, maintaining an up-to-date valuation assists in structuring buy-sell agreements, establishing a fair market price for a partner's stake in the event of their retirement, death, or sudden exit.

  • Helps Polish your Business Before the Big Handoff: You know, an expert business valuator can reveal hidden aspects that enhance your business value. With this newfound knowledge, you can work to maximize your business's worth before passing the baton.

  • Paves the Way for the New Leadership: Bottom line, a comprehensive succession plan stapled with a proper business valuation, ensures your position is filled by someone who values your legacy as much as you do and ensures a seamless transition.

Calling it a wrap, remember, integrating business valuation in succession planning helps understand the real worth of all your relentless grinding. It's all about paving the way for the new leaders, securing the future of your business - your legacy.

Tax implications of succession planning

Business succession planning in Australia involves significant tax implications, requiring diligent planning and expert advice to navigate effectively. Here are key points to take into account:

  • Business Structure and Associated Taxation: The type of business structure utilised, whether it's a partnership, corporation, or sole proprietorship, has notable tax consequences that impact succession planning.

  • Estate Planning: As part of your overall succession plan for your business, estate planning may be considered. This process may involve specialist advice to formulate the most suitable strategy for tax optimisation.

  • Superannuation: Another significant factor to consider is Australia's superannuation system. Typically, superannuation is not subject to the same level of taxation as other assets upon transfer.

  • Capital Gain Tax (CGT) Concessions: Different Capital Gain Tax Concessions apply to small businesses in Australia, such as the 15-year exemption, 50% active asset reduction, retirement exemption, and rollover. These can have a significant impact on succession planning.

  • Stamp Duty: The transfer of business assets may attract stamp duty. However, certain exemptions and concessions are available depending on the jurisdiction and nature of the assets.

Remember, changes in tax laws can significantly impact succession plans. Continuous review alongside your legal, tax, superannuation, and financial advisers is recommended. Given the complexity and the potential consequences of getting it wrong, advice should be sought from a tax or financial adviser when planning business succession.

Family cooking in small business kitchen

Supporting You Every Step of the Way!

You've worked hard to build your business, and we know you care deeply about its future. Managing generational change can feel overwhelming, but guess what? You're not alone in this journey. We, at Trekk Advisory, are here to help you through every step of the way.

Let's chat about your vision for the future and figure out how we can collaborate to create a smooth, effective transition path for you and your successors. We get the struggles and aspirations that come with running a business, and we're passionate about sharing innovative ideas to propel your growth.

Our team of experienced advisors genuinely cares about your success story! So, let's open up a conversation and work together to keep your legacy thriving through generations. We're in your corner, and we can't wait to support you in navigating the future of your business.

About Author

Troy Furness

Troy is one of the Directors of Trekk and considers himself to be our 'Chief Ideas Person' - He has years of experience working in large firms, family businesses, and small practice. During this time experienced lots of successes, as well as some failures. He uses the lessons he's learned along the way to help his client's in any problem they are facing, as well as planning their road to success. The best piece of advice he's been given is "Work hard and the rewards will come, if you give up, then so will the rewards". But while he knows the value of hard work, he also understands the value of personal time too. So, you'll often find him settling in with a good movie with his family, having a punt with his friends or traveling to get some things ticked off the old bucket list in his spare time. If he's ever in need of an injection of motivation, you'll hear him blasting Hilltop Hoods or Eminem and he is hoping to compete in an Iron Man one day soon. A favourite family tradition is watching the Boxing Day Test with his son and if he ever finds the time to read he may pick up a James Patterson 'Alex Cross' novel.

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