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.

In my previous business exit case study I revealed how poorly structured assets can impact the amount of tax payable when you exit your business. This case case study reveals the folly of substituting an estate plan for a properly constructed business succession plan.

How An Estate Plan Can Create An Unwanted Result When You Exit Your Business – Case Study

MontanaCo was an old family company whose ownership was passed down through the generations via estate planning in each shareholder’s will. This practice resulted in uneven ownership of the company and caused problems for its management, with the family slowly losing control to external parties.

Several problems developed through the generations:

• The second generation had one child (the daughter) missing out on ownership altogether, effectively disinheriting her, with control being shared between the brothers. This unfairness caused friction and family breakdown.
• The third generation experienced very uneven ownership when shares were distributed between the various beneficiaries. In fact, one shareholder had no beneficiaries, so bequeathed her shares to her favourite charity, resulting in the family company being 25% owned by an external party. As the largest shareholder at the time, the charity held the largest percentage of voting rights.
• By the fourth generation, the shareholding became very messy, with family ownership and control being diluted. Decisions became difficult to manage and uneven power caused problems. One family member divorced and lost 6.25% of her ownership to an ex-husband, introducing further problems of control and dilution of ownership within MontanaCo.
• The Managing Director in fourth generation held only 4.166% of the shares making it difficult to manage the company with few voting rights by comparison to others in the company.

The following image shows the succession tree of the MontanaCo family company, which used estate planning as its succession plan. You can see the percentage of shareholding being diluted unevenly as ownership is passed down through the generations.

Click Image to enlarge

Results of Using An Estate Plan As A Succession Strategy

By the fourth generation there are:

• 3 bloodline shareholders with 12.5%
• 3 bloodline shareholders with 6.25%
• 3 bloodline shareholders with 4.166%
• 1 non-bloodline ex-husband holding 6.25%
• 1 non-bloodline lost dogs’ home with 25%

There was no structure in place obliging non-bloodline shareholders to sell back to the family members.
Two of the family members who held the smallest shares had responsibility for management of the company and experienced a lot of difficulty from less-involved but more powerful shareholders, causing continual friction and leading to operational difficulties.

The good news for this family company was that the situation could be rectified with the majority shareholding vote. You can discover the full solution for this succession case study in Part 5 of my book, Your Business Succession: How To Exit Your Business For Maximum Cash Flow And Profit

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

Click here to take the FREE Business Exit Quiz (invest just a few moments of your time) and discover where your business succession strategy may be letting you down, and how to improve your chances of building a business for maximum profits cash flow and profit.

To Your Profitable Business Exit,
Leigh Riley

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Overcoming Business Succession Strategy Weaknesses

My previous post consisted of a case study about how to eliminate or reduce tax payable when you exit your business, and in an earlier a post I identified the 8 Exit Strategy Weaknesses that you want to overcome for a more profitable exit outcome.

Being in business requires you to maintain updated knowledge of a vast range of issues, and the economic factors impacting your business are just as important as anything else I’ve covered in this blog series.

Understanding the trends that will develop and change your business as a result of economic factors will be crucial for the longevity and continued viability of your business.

On Friday I was speaking with a dentist who was busy factoring in demographic population shifts and social change to his business decisions.  He was thinking about how these factors that he had identified would affect his Dental Practice earnings over the next 10 years.  Cleverly, he is actively planning his business for the shift in demand, to ensure his Practice continues to remain relevant to the market and profitable well into the future.

Who would have thought that tooth repairs would be affected by changes to the economy?  But dentistry is a business like any other, and this very smart dentist is fully across that fact.

Here’s an economic reality that will affect every business, no matter what your industry or business focus may be.  The Global Financial Crisis (GFC) has had a long lasting effect in ways you may not have imagined.  Even if your business has grown and continued to prosper through this period, it is very likely it will bite you when you go to sell – unless you’ve put in place a healthy exit strategy.

How To Can the GFC Effect Your Business Exit?

If you’re expecting to sell your valuable business asset, start thinking about the price that someone will need to pay to buy.  If you’re like many business owners I’ve met, you may have built an asset that is not easily afforded without the buyer borrowing to purchase.

Now here comes the GFC crunch point: all financial institutions are scrutinizing very carefully the money they lend for business purchases since the GFC.  They will only lend to people who have substantial assets to back the loan, and in the absence of that, financial institutions require a very healthy business proposition with a high level of business asset backing and robust sustainable and proven cash flow.

That reality is certainly applying pressure to business owners who hope to make an easy sale in the immediate or medium term.  The situation isn’t likely to improve for some time, so it wouldn’t be wise to live in hope that it will pass soon.

How can you prepare to sell your business for the price you want?

You want to start preparing now!

• Boost your revenue and continue to show a healthy profit.
• Tidy up your business financial status.
• Identify the trends for your industry and start leading your business into the long term sweet spots of revenue earning.
• Develop a strategy that will position your business earnings for the long term.
• Think outside the square about who will buy your business, and how you can position your buyer to afford your business so you can exit with maximum cash flow and all the profits you deserve for the lifetime of effort you’ve invested in building your business.
• Gather a team of succession experts to assist you in locking in your strategy, and make sure they’re working collaboratively for your benefit, so that you receive the best possible solution that will overcome all the barriers we’ve identified.

If you need a quick summary of the aspects of your business that will get you started on preparing your business succession, you can take the Business Exit Quiz. It’s FREE, and you will receive a customized analysis of your exit readiness with a list of items that you need to work on to maximize your business sale price.  The 10 questions usually take 2-3 minutes to complete.  So what are you waiting for?  Click here now to take the Business Exit Quiz.

You could also read the book ‘Your Business Succession‘ for a comprehensive commentary on how to prepare your business for maximum cash flow and profit at your exit.  Order your copy of “Your Business Succession” online.

To Your Profitable Business Exit!

Leigh Riley

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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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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 disappointing business succession outcome for you.

My previous post in this series revealed how transparent Terms Of Sale can seal the deal for a favourable business exit
and this post outlines a powerful case study about the impact on final profits of tax payable by an Australian company at the time of business succession.

How To Eliminate Or Reduce Tax Payable When You Exit Your Business – Case Study

In March 1994 the four Cabernet brothers inherited from their father a family-owned Australian wine company valued at $5 million. They inherited equal shares of 25% each at a cost base of $1.25 million each, made up of:

• Active Asset Land Value $3.5 million
• Plant and Equipment $1.32 million
• Goodwill $180,000 [Turnover $720,000]

In November 2008, the Cabernet family decided to exit the wine business and sold the company shares, which had grown in value to $16 million (i.e. $4 million each), comprising:

• Active Asset Land Value $12.0 million
• Plant and Equipment $3.5 million
• Goodwill $500,000  [Turnover $2 million]

The disposal effectively resulted in realised capital gains for each brother of $2,750,000.

Total Australian tax was calculated (after making use of available exemptions) and due on the sale proceeds for each brother. The amount of tax shared among them was $337,500 (i.e. $84,375 per brother, not including Medicare levy, which at 1.5% would be $41,250 each, assuming they all have private health insurance).
NB. This example uses the tax rates that applied in the year the business was sold (i.e. Australian tax rates as at 2008/2009).

If the Cabernet brothers had sought specialist advice and implemented proper tax planning strategies well before the sale, they could have reduced their combined tax liability by $247,500 to only $90,000 (not including Medicare levy). That’s a reduction in tax of $61,875 each, which could have been achieved without changing any of the circumstances in the existing scenario.

Eliminating Tax by Seeking Pre-Business Exit Tax Advice

Had the Cabernet family taken prior advice and been prepared to make just a few slight changes to the scenario before signing the contract of sale, they could have actually reduced their tax liability to nil, which would have saved them $337,500 in tax.

How is this possible?

Tax laws are complex, so your options will vary depending on where in the world your business is located. To fully understand what the Cabernets could have done to achieve a better outcome, you’ll need to understand the rules that apply in Australia. Specialist tax advisers have spent years understanding how the rules can be used to your benefit, so your safer option is always to obtain advice from an expert in capital gains tax law and business transfer in your country.

You will find more specific information on how to reduce tax by choosing the best structure in Chapter 16 of my book, Your Business Succession: How To Exit Your Business For Maximum Cash Flow And Profit with specific solutions to the Cabernet family’s  business exit problem.

How 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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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 which may cause a disappointing business succession outcome for you.

The previous post in this series revealed why you want to move from the Unilateral Zone to the Three Dimensional Zone Of Value™ in your business to boost your business exit cash flow and profits and this post demonstrates that transparent terms of sale can seal the deal for a favorable business exit.

How Transparent Terms Of Sale Can Seal The Deal For A Favorable Business Exit – Case Study

Chemical manufacturer, Christopher, wanted to retire from his business, which produced manufactured products and cleaning goods using protected formulas.

He easily attracted an interested buyer due to the financial data he was able to provide. However, the contract sale terms were terminated when it became clear to the buyer that the chemical formulas were not clearly documented, and Christopher was not willing to provide these in a written format with a manual.

The buyer lost faith due to the seller’s lack of transparency, and abandoned the sale.

This was a wake up call for Christopher and he finally agreed to provide the documentation, but the buyer no longer wished to proceed with the transaction, because he now believed that Christopher was less than honorable.

As you read this case study, it may seem very obvious to you how this problem could have been avoided. However, as was the case with Christopher, too many business owners are unaware of how their actions (or lack of action) can affect their business exit until it is too late.

So I can’t emphasize strongly enough how important it is for you to be transparent and to document clearly exactly what you intend to include in the sale of your business as you prepare to exit.

How to document your business processes is discussed in more detail in my book, Your Business Succession: How To Exit Your Business For Maximum Cash Flow And Profit with specific solutions to Christopher’s business exit problem in Part 5.

How well prepared are you to exit your business with maximum cash flow and profits? Take the FREE Business Exit Quiz (only 5 minutes) and find out exactly where your business succession strategy may be letting you down, and how to improve your chances of exiting your business for maximum profits and cash flow.

To Your Profitable Business Exit,
Leigh Riley

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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 disappointing business succession outcome for you.

My last post pointed out the pitfalls of failing to value your business properly, and this post explains why you want to move your business from the Unilateral Zone of Value™ to the Three Dimensional Zone of Value™ so that your business will have the highest possible valuation at the time of succession.

Why You Want To Move From The Unilateral Zone To The ‘Three Dimensional Zone Of Value’™ In Your Business – Case Study

Fritz was the successful owner of a car dealership that he had operated for more than 20 years. He proudly conveyed that the primary value in his business was his own personality and ability to develop relationships. He was resolved that he was the sole reason for the business success and he knew when the time arrived for him to leave, he would have nothing to sell other than stock, the premises, office equipment, and other goods and chattels.

Fritz admitted to having no formal arrangements with customers and suppliers, who continued their association simply because they liked to deal with him. He considered his staff to be mere instruments for backing him up in the operation, because they added no value to his business turnover or efficiencies without his specific instructions.

Fritz’s biggest complaint about having a business was that he could not get enough time away from it to relax and enjoy some of his success. This is a classic example of a business operating in the ‘Unilateral Zone of Value™’.

This example demonstrates a business strategy problem, but it also is representative of a case with leadership, management, contingency and continuity problems.

Obviously Fritz needs to develop his car dealership from the ‘Unilateral Zone of Value™’ into the ‘Three Dimensional Zone of Value™’ if he wants to increase the business value, and therefore the selling price at the time of exit, which could occur either at a time of his choice, or by circumstances beyond his control.

How to build your business value to the Three Dimensional Zone of Value™ is discussed in more detail throughout my book, Your Business Succession: How To Exit Your Business For Maximum Cash Flow And Profit with specific solutions to Fritz’s predicament in Part 5.

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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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 disappointing business succession outcome for you.

Failing to properly value your business was one of those weaknesses, and is the subject of this real life business succession case study.

The Effects Of Failing To Properly Value Your Business – Case Study

A sole director (Dave) was nearing retirement and recognized that a talented, key income-generating employee (Pete) would be an ideal candidate to take over the business.

Dave gave Pete 20% of the company without Pete paying any financial consideration, as incentive to retain him. Pete was delighted to enter into a buyout agreement set up by Dave’s accountant to acquire the further 80% over four years .

Dave based the valuation of his business on his own estimations, as he did not believe it was worth paying the accounting fee for a proper valuation.

Later, while Pete was honeymooning overseas with his new wife, Elise, he died in an accident. Elise, being well advised, arranged a business valuation and made a claim on Dave for her share of the business that she now rightfully owned as Pete’s sole beneficiary.

Dave didn’t think he should pay Elise anything, because Pete didn’t pay for the shares. What’s more, Dave was surprised to learn his business valuation was higher than he thought, so he had given away much more than he had estimated.

Unfortunately for Dave, the legal opinion was that Elise was entitled to due payment for the full amount of the valuation. Dave had to go into debt to pay Elise, significantly delaying his retirement until the debt was cleared.

This case demonstrates a strategy problem in Dave’s succession plan – while he recognised the value in arranging a succession plan, he had failed to obtain a formal business valuation, which let his entire exit strategy down. It also reveals the impact of overlooking other common areas of business failure, such as contingency and continuity problems, which are identified and discussed in detail in Part 5 of my book Your Business Succession: How To Enter, Execute And Exit Your Business For Maximum Cash Flow And Profit.

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, so you can learn how to improve your chances of building a business for maximum profits and cash flow and profit.

To Your Profitable Business Exit,
Leigh Riley

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Would Your Business Exit Strategy Gain The Royal Seal Of Approval?

Succession planning is an important part of every business, even when you’re in the ‘business’ of running an entire empire. The British royal family is an entity that needs to ensure continuity, just like any successful business, and as one of the longest standing entities in the world there are many succession planning tips that can be gleaned from their succession hiccups and subsequent strengths.

Consider one of the most famous royal succession dilemmas – the abdication of King Edward VIII in 1936. King Edward’s lifestyle decision to leave the family business left his brother Albert to step up with short notice to become King George VI.  Without a clear succession path already in place, and a suitably trained candidate waiting in the wings, the sudden change in the line of succession could have been a disaster.

The plight of the British Royals could have again been compromised when King George’s rein was ended by his sudden death.  His daughter, Elizabeth II, was forced to automatically assume the helm at the young age of 26.  A daunting task by anyone’s measure, especially for one so young.  However, the impeccable preparation helped to overcome a difficult and potentially unsuccessful situation, and produced instead, what is not only the second longest serving royal in history, but arguably the most successful monarch ever.

Such an exemplary track record was developed over time as a result of many instances of meandering succession. Back-up plans and specific succession strategies for the royal family eventually evolved and are now solidly in place. Instead of assuming succession will go to plan, they identify a second, third, fourth all the way down to 54th in line for the throne!

All those in the succession line have an understanding of their responsibility and the protocols of the business they are in, which maximizes continuity despite death, disability or any other unexpected events. No argument can change who will succeed because the details are well documented in the British Constitution – which contains the royal equivalent of a formal, written succession plan.

In addition to a written plan, the royal family also has the Parliamentary Statute, which essentially acts as a ‘board’ to make fair decisions about succession problems if and when required.  The Statute has the power to deprive Sovereigns of their title due to misgovernment. It came into existence in 1868, when intervention by the government became necessary after King James II fled England, leaving the throne vacant. Parliament ruled that he had abdicated, and so they offered the position to James’s daughter and her husband as joint rulers.

How To Plan Your Business Succession Like A Royal

The lessons learned by the British royal family throughout history provide an excellent guide to the key elements required for your business succession planning success:

• Identify potential successors. The British parliament and the royal family would not allow just anyone to take over the throne.  Similarly, most business owners feel strongly about the kind of person they believe can successfully continue their organisation in the future.

Think about who the most likely candidates to take over and buy your business might be. Often the most suitable candidates are people already known to your business. They may be internal, such as co-owners or staff, or even external competitors or suppliers.

Are there special attributes or qualifications that potential new owners must have? This may include legal, financial, licensing or educational factors. Early identification of candidates for succession  allows ample time for the necessary training and personal preparation so the successor is ready to take the ‘throne’ when the time comes.

• Recognize that family ties aren’t enough to ensure successful succession. Family members in business often make verbal agreements because they share a presumed relationship of trust. Many business owners have fallen on hard times because they believed their relationship with other parties ensured the agreement would be honored in the manner intended.

The problem with verbal agreements amongst family members is that circumstances can change; people’s recollections become blurred over time and misunderstandings result not only in relationship breakdown, but also in business breakdown, often with devastating consequences for all concerned.

• Communicate the process clearly so that everyone involved understands what is expected. This is important because too often in business insufficient thought is put into who will step up to fill management roles.

Assumptions are sometimes made without consultation or discussion with the individuals concerned. How to divide a business in a family situation, for example, can be one of the hardest decisions of all, particularly if the main asset you hold is your business and you have one or more children competing to eventually take control. If business continuity and an amicable outcome in terms of maintaining the quality of your relationships are important to you, a wise strategy is to communicate your intentions to all those involved, and to gain feedback and acceptance from the main stakeholders.

If you fail to do this you can be fairly confident that you will reap disaster in terms of financial disappointment and relationship breakdown.

• Document the legal process. The British Constitution wasn’t created in a day and it certainly wasn’t the work of one individual. Your accountant, lawyer and financial adviser need to work together to ensure your succession plan documents are in order to ensure a smooth and profitable succession.

One of the biggest mistakes made by owners is to assume that the business’s existing Shareholder Agreement or their personal estate plan is sufficient to handle the succession process. Depending on the strategy you choose, you may require any number of legal documents to ensure a smooth succession plus maximum cash flow and profit.

These may include a buy-sell agreement, which gives the first right of buy-out to a given party, or an Employee Share Ownership Plan (ESOP) which may be implemented to allow key employees to join in ownership of the company. ESOPs are already widely used globally and are increasingly being used more in Australia to ensure that successors are financially prepared to fund the buy-out.

• Prepare for contingencies because in real life things don’t always go to plan. Royal, or not, individuals change their mind, act unpredictably, sometimes irresponsibly and have their own passions and motivations.

Disputes, death, disability and divorce are also factors that can disrupt a business’s operations. Planning for all the positives is a good idea, but overlooking possible problems you may face isn’t realistic and doesn’t allow you to mitigate potential issues and create a more certain outcome.

• Appoint a mini board. Just like the Parliamentary Statute in place to oversee British Royal family operations, you can appoint a board to assist with decision making when required. A board may allow you to draw upon knowledge and experience that is not available within your business, and can benefit you by providing arms-length impartiality, fairness and accountability to your succession planning that may not be achievable on your own.

Many small to medium business owners believe that their size prevents them from having a board, but this isn’t the case. Even small businesses can benefit from having a ‘mini-board’ to ensure some degree of impartiality when it comes to making business decisions, especially surrounding what can be emotionally charged succession planning issues.

The succession strategies responsible for the longevity of the British royal firm offer clear evidence that these factors form the basis for assured long-term continuity, and that using these principles can allow your business legacy to live on, long into the future.

To Your Proftable Business Exit,
Leigh Riley

Leigh Riley is the author of the first book of Australian case studies on succession planning, ‘Your Business Succession’, providing  strategic, tactical, practical and educational support for business owners who want to exit their business with maximum cash flow and profits.

More information and free book chapters are available at Your Business Succession blog

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How Prepared Are You To Exit Your Business With Maximum Profit And Cash Flow?

My inspiration for writing my book ‘Your Business Succession – How to Enter, Execute and Exit Your Business For Maximum Cash Flow & Profit’ came from a true tale about business succession.

Business Succession Case Study: When Harry Met Sally And Greg

When I met Sally she had just transitioned into owning a business in which she had been employed for a number of years.

Sally’s employer, Harry, built a very successful business and was now ready to sell and retire. None of his children were equipped to take on the role of leading the business, but Harry recognized that Sally was the primary income generator on his sales team. In addition, she was trustworthy, dedicated, hardworking and results oriented.

The Succession Plan

Given the size of the private company, Harry knew he wouldn’t find a buyer very easily. His best option was to offer Sally and another employee, Greg, a substantial interest free loan with special terms  to take 60% ownership in two equal shares of 30% each. The remaining 40% of the company would be allocated in equal shares amongst Harry’s four children.

For Sally and Greg this was a fantastic opportunity to own a piece of the business they had worked so hard to build. Harry was prepared to take the risk of providing an interest free loan each to Sally and Greg, because he trusted them both.

Fortunately Harry was in the financial position to afford to wait for payment, and  did not require immediate cash inflow from the funds he had loaned. His secure asset base aside from the business, allowed him the luxury of funding his retirement without the need for immediate capital injection. Harry’s ability to do this is extremely rare amongst even the most successful of business owners.

Problems For Harry With The Succession Plan

Harry’s willingness to leave his future success vulnerable to the management styles and decisions of Sally and Greg really makes him stand out in the crowd.  Harry’s succession plan was not his best option, but he didn’t leave himself with a lot of choice. Due to lack of planning, and incomplete advice, it was the best solution he could think of for his business exit.

I became involved after Sally and Greg had taken over Harry’s business, when they were referred by Sally’s personal accountant, Josh. No formal agreement had been arranged at that stage – everything rested on a verbal agreement. Josh was diligent enough to appreciate that a verbal agreement was unacceptable as it left all parties vulnerable.

As a chartered accountant, Josh was handling the tax issues and was relying on my expertise to sort out all the contingencies relating to the business succession, including the debt owed back to Harry.

Josh engaged a lawyer colleague, Michael, to draw up the legal agreement. We all needed to arrange our various parts of the succession plan between Sally,  Greg and Harry.

I did not have the opportunity to work directly with Michael, but I certainly took care of my part in the process to the best of my ability. I feel certain that Michael also exercised his legal expertise within his range of knowledge as well.

However, it turned out that Michael’s main legal expertise was in the area of industrial relations, not succession planning.  This was as unhelpful as consulting a dermatologist about a bone fracture!

Tax Implications Overlooked

Josh, acting as the accountant on the matter, did not understand all the tax implications specifically related to succession planning, because his experience was limited to general business accounting, so he did not have the knowledge and skills to recognize the potential problems.

The outcome for Sally, Greg and Harry was totally unsatisfactory, in that it clearly did not solve all of their succession problems. Their succession plan was not structured in the most effective manner as the legal agreement amounted to little more than a shareholders’ agreement (Chapter 9 of  ‘Your Business Succession’ explains why a shareholders agreement is insufficient and is a weak strategy for effective succession planning).

The strategy had not addressed all the tax issues they would face in the future, nor did it provide an adequate agreement with clearly defined terms to cover all the identifiable succession triggers. Chapter 2 of  ‘Your Business Succession’ covers the 6 specific categories of Business Events, some of which are unexpected, that will lead to your business exit.

Succession Problems For Sally And Greg

This was a major problem especially when Greg had health issues that meant he could not arrange enough insurance to cover his commitment, and had insufficient assets to provide collateral as back-up for the debt outstanding.  This meant Sally would remain in a vulnerable financial position for a very long time because she was now solely responsible for repaying the debt to Harry.

From my observation, the resulting inadequate succession plan was largely due to failing to engage a team of cooperating professionals with succession planning knowledge, skills and expertise.  Adding to the problems was the fact that each professional had a blinkered approach, which left gaping holes in the strategy.

Each had expected the other to know their role. If only each had questioned the other with more understanding and communicated as a team to uncover the full extent of the problems. The worst part of this situation was that Sally and Greg’s understanding was so limited that they were unable to understand the gravity of their vulnerabilities.  Despite my repeated warnings with full explanations, I could not convince them of the need to revise their incomplete succession plan, particularly when Josh acting as their accountant, had assured them everything was in order.

I vowed never to let this happen again.  It really brought home to me the need to work in a team of experienced succession planning specialists. I decided then and there, that in future I would  work only with experts who were prepared to work as a cooperating team, for the greater good of the client! For me, that would be the only way to provide a complete business succession planning strategy that could stand the test of time.

Fortunately, I have now found that team, and choose to work directly with these noted succession planning specialists. This has added significantly to my ability to increase the value that I personally bring to my clients.

Education In Succession Planning

I was shocked to discover how little  information of sufficient quality was available about succession planning that was specific to the Australian context. I found plenty written by overseas authors, but these books were based on rules and tax laws that did not apply to Australian business owners.

Anything Australian that was available had focused only on specific aspects of succession planning and did not provide a complete picture. Such a limited focus had the potential to actually create many of the problems businesses being faced.  I resolved to try and change that situation once and for all, with my latest succession planning book, the Business Succession Profits Quiz and this educational blog.

Share Your Business Succession Story

The focus of this site and blog is an educational one, so feel free to comment on this post or to share your business exit story and perhaps prevent other business owners from failing to get the profitable exit their efforts deserve.

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