Business Succession Strategy Weaknesses

In a previous series on why too many business owners fail to exit their business with maximum cash flow and profits, I identified 8 business exit strategy weaknesses that may contribute to a reduced business succession outcome for you.
My previous post in this series revealed how to eliminate or reduce tax payable when you exit your business through a powerful case study about the impact on final profits of tax payable by an Australian company at the time of business succession.

How Your Assets Are Structured Impacts Tax On Disposal Or Transfer Of Business Assets When You Exit Your Business – Case Study

Myra and Eddie developed a thriving print manufacturing company over their lifetime. Their children Beth and Robert both worked in the company. This was a family who really worked well together, so when Myra and Eddie were ready to retire from the company, they were confident about transferring the company to Beth and Robert as joint owners. They required no payment from their children for the business because their superannuation fund owned the factory (worth $5 million) from which the business operated.

The business would continue to pay rent to Myra and Eddie via their superannuation fund, which happened to be very tax effective and provided more than enough income for them to live comfortably. Myra and Eddie had also arranged for the factory to pass onto Beth and Robert as their beneficiaries, so they did not worry about ownership of their business premises.

The business succession appeared to be organised and settled, and they believed that everything was structured to be as tax effective as possible.  However, there was one big problem awaiting Beth and Robert that no one had considered. Not even their existing tax advisers and lawyers had anticipated this problem and its devastating effect, as they were not experienced with succession planning.

In this case, once Myra and Eddie passed on the factory via their superannuation to their beneficiaries, Beth and Robert, a massive tax liability resulted. As adult children receiving the proceeds of their parents’ superannuation accounts, up to 30% tax had to be paid on the account value. Inheriting the factory, valued at $5 million, would attract a tax bill of around $1.5 million.

There was no way Beth and Robert could afford to meet that liability without selling the factory. However, selling the factory caused another costly dilemma, because their business relied on the location and facilities in the factory to continue its operation. Relocating could not be arranged easily without incurring a lot of disruption and costs to the business.

The stress of the situation engendered undue tension between Beth and Robert. They began to argue about the options, leading Beth to decide that she wanted to sell out her half. Robert could not afford to buy out Beth. The situation became very difficult, affecting the business’s performance in a slow economic environment. Their business could not find finance in the prevailing market.

One simple solution would have been to use insurance over the couple’s lives to fund the anticipated tax liability payable on the transfer of the factory from Myra’s and Eddie’s super fund to the adult children.

Another option would have included a strategy to withdraw the business premises from Myra and Eddie’s super fund altogether. Under current tax law, no tax would be payable by Myra or Eddie provided they were aged 60 years or more; however, stamp duty would be payable on the transfer. It would be prudent to weigh up the transfer costs against the potential tax costs of transfer upon death before arranging, to ensure Myra and Eddie would not be disadvantaged. They could come to some arrangement with Beth and Robert to meet the transfer costs, which are likely to be a lot lower than the superannuation death tax that would apply.

You will find more specific information on how to reduce tax by choosing the best structure in Part 5 of my book, Your Business Succession: How To Exit Your Business For Maximum Cash Flow And Profit with specific solutions to Beth’s and Robert’s family’ succession problem.

How well prepared are you to exit your business with maximum cash flow and profits?

Take the FREE Business Exit Quiz (5 minutes of your time) and find out where your business succession strategy may be letting you down, and how to improve your chances of building a business for maximum profits and cash flow.

To Your Profitable Business Exit,
Leigh Riley

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