BUSINESS SUCCESSION PLANNING

Most Self Employed people spend all their working career building up the business, ploughing profits and capital back into the business to increase family wealth. Starting out with partners or, bringing partners into the business as the business expands over the years.

Very few business's have an equity, exit strategy in place. A partner of a business may have $500,000 in assets sitting in the business. How does a business get the money to the estate of the business partner that has died or become incapacitated and is no longer able to work in the business?

These are quite often complex issues that can be planned for when a good Business Succession Plan is in place. When it is in place it ensures the certainty to all parties involved that every one will be catered for in the event of untimely accidents or the death of a business partner.

New Wealth Directions specialise in this very important area of Business Succession Planning. We have access to Australia's best, specialist legal firms who only deal in Personal Estate Planning and Business Succession Planning.

 

Capital Gains Tax:

Have you seeked advice on what your business Capital Gains tax position would be if you passed away as a part owner of the business? Remember all assets are subject to capital gains tax after the 20th September 1985. The passing of these assets to your Estate for your family could be subject to hefty Capital Gains Tax. Leaving the after tax proceeds from the business, not quite what your spouse and family thought was going to support them.

Capital Gains Tax is quite often overlooked when calculating any exit strategy for a business partner. 

Business Debt In any well planned exit strategy the level of business debt needs to be accounted for in the event of a business partner's untimely death. The share of the debt that the partner was responsible for will need to be paid for some how. Compensation by the estate is a solution but this is not usually practical as the spouse of the partner who has passed away will be the executor of the estate and they usually won't use personal assets of the estate to clear debt of the business she / he no longer has an interest in. 

Personal Bank Guarantees provided by Business Partners:

The bankers of the business who have supplied Overdrafts, Lines of credit or business loan facilities will become concerned about the loss of a key person in the business. The partner who has passed away would have been integral to satisfying the banks credit department when assessing the credit risk when loans were first established for the business. If the business can't satisfy the bank that it can still meet the commitments of the loan facility, then the bank may adjust the terms of the loan or call the loan in.

The bank will need to be comfortable with the changes in business risk. Who will take over / support the banks exposure to extra credit risk, probably not the spouse.  As you can see these issues need to be dealt with. A good business can come into problems if these issues are not planned for.


Life Insurance:

When looking at a Business Succession Plan usually comes down to “where is the money going to come from” if a business associate dies. How is the Business going to fund the release of a partner's equity in the business to their personal Estate?

Life Insurance – again structured into the personal Succession Plan is usually the most cost effective way to fund the release of equity. The business pays for it and the Insured lives are the business associates who have an equity interest in the business.

 

Total and Permanent Disability Insurance:

Of course you must consider what happens to the business if your business partner doesn't die but becomes totally and permanently disabled?

What if your business partner suffered one of the following:

  • Became stressed and rendered them unable to work again
  • Had an accident and became a paraplegic
  • Became sick and was unable to work again

The most common excuses today are that These conditions described above are never going to happen to me. Some of them are highly unlikely to happen... millions to one.  Other condition’s listed above are responsible for a very large percentage of Australians dying each year, in fact heart attack is the number 1 killer in Australia!

For further understanding of some of the issues involved read the information underTPD Insurance.

 

Trauma Insurance:

Of course you must consider what happens to the business if your business partner doesn't die? What if they suffer a major Traumatic condition and can't work in the business again?

What if your business partner suffered one of the following:

  • Heart Attack
  • Cancer
  • Stroke

What would the business do! could it carry on? Possibly but all these issues need to be considered when thinking about your business and how it relates to your families wealth in to the future.

For a further understanding of some of the issues involved read the information under Trauma Insurance.