Sound Estate Planning and Business Succession

Case study: Sound Estate Planning and Business Succession

Jeff and Peter had a 20-year-old business that had grown organically and was now worth several million dollars but when they first came to see us a decade ago, they had a very brief business plan without a legally binding agreement between the partners.

Investing for your future

Although Jeff and Peter were looking to work in their business for at least another 10-15 years, we advised them that a comprehensive succession plan was a wise investment in their company’s long-term success and in their own individual financial futures.

Primarily, a business succession plan made the company far more attractive to investors because it minimised the potential for operational disruption when either one or both owners decided to leave. By planning their exit well in advance, Jeff and Peter maximised the value of their business while addressing its future structure.

We talked through several issues with Jeff and Peter, including ensuring that they separated their personal from their business interests. We encouraged them to implement a new accounting system and to hire a more experienced general manager to ensure that both legal and the most efficient business processes and procedures were employed and followed.

In consultation with us and their lawyers, Jeff and Peter composed a comprehensive business succession plan which named their successor and alternatives; a timeline for proposed changes including their own exits from the business; the new organisational structure with key personnel changes and the resultant business registration, insurances, and bank contract amendments; a current business evaluation; their own retirement income and payments; and all sale and management buyout details including the taxation implications for all parties’ taxation – business and personal.

Budgeting for superannuation

Part of their discussions around the succession plan was budgeting for the amount of superannuation both men would need in retirement. To do this, we talked about restructuring the business and increasing the amount of superannuation in the most tax-effective way.

Tax strategies in business succession

We discussed the most tax-effective way to move equity out of the business when the time came and referred Jeff and Peter to a specialist tax lawyer. Neither had much insurance apart from death insurance so we recommended that they take out income protection, permanent disability, and trauma insurance to ensure minimal disruption to their business and personal lives should anything untoward happen.

We also indicated the importance of the time of the year in which any sale took effect – optimally, around June 30 so they had the option to distribute funds in the old or the new financial year, depending on circumstances.

Changing familial circumstances

Several years later, Jeff and Peter’s business had, with the help of outside investors, continued to grow. They were getting closer to retiring when a change in family circumstances meant that neither their successor nor their alternate successor – both children of theirs – were interested in becoming involved with the business.

We considered different options and Jeff and Peter decided that their manager, who had several times expressed interest in the business, was their best option as a successor. In consultation with a commercial lawyer, we devised an incentive plan for the manager whereby he received an equity share which was part-gift, part-earned, to make it attractive for him to stay involved and motivated in the business.

Jeff exited the business first, consulting on a part-time basis for a year to ensure a smooth transition before complete retirement. Two years later, Peter exited. Neither man retained any equity in the business and, thanks to astute planning, were able to withdraw their final payout without disruption to business operations or its cash flow.

Wills and estate planning

Jeff suspected that his eldest son by his first marriage, with whom he had an acrimonious relationship, might contest his will. His estate planning needed to safeguard against any challenges that might be made.

We advised Jeff to update his will to set up a Testamentary Trust upon his death and nominate a Trustee.

After Jeff’s demise, his assets will be protected by this Trust and cannot be accessed without the Trustee agreeing to distribute them to his named beneficiaries. Furthermore, as the beneficiaries legally own none of the assets, Jeff’s other children and benefactors are protected from Jeff’s first son laying claim to his assets posthumously.

Call StrategyOne today to arrange your obligation-free meeting: 02 9419 5233.

StrategyOne Advice Network is an authorised representative of Fitpatricks Private Wealth Pty Ltd, AFSL No. 247429, ABN 33 093 667 595 (“Fitzpatricks”).

The information in the above Case Study is of a general nature only and is not intended as a personal advice. It does not take into account your particular investment objectives, financial situation and needs. Before making a financial decision you should assess whether the advice is appropriate to your individual financial situation, needs and objectives. We recommend you consult a professional financial planner who will assist you.

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