You should remember that running a business requires years of work, financial investments and wide array of decisions that can help you create something valuable. However, most business owners tend to focus on everyday operations, growth and profits without considering what will happen with the company after they pass away.
This is where business succession planning becomes essential. You should enter here to learn more about business succession.
In simple words, business succession planning involves determining who should own, manage or control your business when you are no longer able to do so. Although having a will is an important aspect of estate planning, you should avoid assuming that a will by itself will handle every single aspect of business succession.
The reality states that everything depends on your business structure, ownership agreements, company documents and the way your estate plan is organised.
The main idea is to ensure that your will and business succession strategy work together instead of creating different or conflicting instructions. In further article, we will talk about business succession planning and things you should consider when determining whether your will covers everything. Let us start from the beginning.
Things to Know About Business Succession Planning
Business succession planning is the process of preparing for the future ownership and management of your company. It does not matter whether you own a small family business, operate as a sole trader or have shares in a larger company, because your business interests may represent a significant part of your overall estate.
A succession plan can determine who should take control, whether the company should continue operating and what happens to your ownership interest. For instance, you may want your children to inherit the company. On the other hand, you may prefer another owner to purchase your share while your family receives the financial value.
These situations require different arrangements, which is vital to remember. We recommend you check out Futura Planning Ltd for more information about this particular topic.
Your Will Is Important
We can all agree that a will is an essential estate planning document. It allows you to state how you wish certain assets in your estate to be distributed after your death and appoint people responsible for administering everything.
If your business interest forms part of your estate, your will may contain instructions regarding who should inherit it. However, the process is not always as simple as writing that your company should go to a specific family member.
The type of business you own and agreements you already have in place can affect what happens with your interest. Therefore, your will should be considered together with the overall business structure.
Business Structure Makes a Difference
One of the most important factors is the legal structure of your business.
Suppose you are a sole trader. In that case, the business and its assets may be closely connected with your personal estate. The situation can be completely different if you operate through a limited company because the company is a separate legal entity and you may personally own shares rather than the underlying company assets.
Partnerships can feature additional considerations because partnership agreements may contain specific provisions regarding the death of one partner. The main idea is to understand what you actually own before deciding how your will should deal with it.
Check Shareholder and Partnership Agreements
You should know that existing business agreements can play an essential role in succession planning. For instance, shareholders may have an agreement that determines what happens when one of them passes away. The agreement may include provisions regarding the sale or transfer of shares, valuation and the rights of other shareholders.
The same thing can happen with partnership agreements. Suppose your will states that you want a specific person to receive your business interest, while an existing agreement requires that interest to be offered or transferred in another way. In that case, your succession arrangements may become more complicated than expected.
Therefore, we recommend you review both estate planning and business documents together.
Ownership and Management Are Not the Same
Another important consideration is understanding the difference between inheriting a business and running one. You may want your children to receive the financial value of your company, but that does not necessarily mean they have the experience or desire to manage everyday operations.
For instance, one child may already work inside the company while another has chosen a completely different career. Dividing ownership equally without considering management responsibilities may create challenges afterwards. Business succession planning allows you to consider these factors beforehand.
The goal is not only to determine who receives something, but also who can realistically maintain business operations after you are gone.
Think About Business Continuity
The death of a business owner can create uncertainty for employees, customers, suppliers and other owners. Salaries still need to be paid. Contracts may require attention. Customers will expect existing services to continue, while employees will want to know who is responsible for important decisions.
A will primarily deals with the distribution of your estate after death, while practical business continuity may require additional arrangements. Therefore, you should consider who can handle immediate responsibilities and whether relevant people understand what should happen during the transition.
The more dependent the company is on you personally, the more important this planning becomes. Check out this guide: https://business.gov.au/planning/business-plans/develop-your-succession-plan to learn more about developing your succession plan.
Consider a Business Sale
Not every succession plan requires a family member to take over the company.
In some situations, selling the business may be the best course of action. You may arrange for another shareholder, partner, employee or third party to purchase your ownership interest based on specific circumstances. The proceeds can then provide financial value for your beneficiaries instead of leaving them with a company they do not wish or know how to operate.
Of course, selling a business requires consideration regarding valuation, funding and existing agreements. Planning beforehand can make this particular transition considerably simpler than leaving your family to make complicated decisions immediately after your death.
