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Chess game king and queen

Why You Need a Succession Plan in Place

4 minutes read time

Whatever your family circumstances, or the structure of the business, the key is to have a plan.  Have the discussion. The succession plan can begin simply, and be updated over time to take account of changing circumstances.  Doing nothing is not an option!

At some point in time, a family business owner must face the dilemma of how to transition out of the business into retirement, or semi-retirement, and whether to pass the business in their lifetime or on death, to family, or non-family members.  Whether the business transitions during lifetime, or on death, will depend on a number of factors, such as the availability of income and capital to fund retirement, the need and willingness to pass control during lifetime and related asset protection issues. In addition, the capital gains tax and stamp duty implications associated with the transition will need to be considered.

Legal work within a family business tends to be prioritised as an urgent need arises, for example brand and trade mark protection, supply and distribution contracts, workplace and employment agreements. Succession planning is often left until later.  But what if there is no later?  What if an owner dies unexpectedly without having any succession plan in place?

Businesses are usually conducted through companies, trusts and unit trusts.  Solely-owned assets, including shares in companies or in corporate trustees, or units in a unit trust will pass under the intestacy rules without a Will in place.  The intestacy rules vary from state to state. For example, in South Australia the surviving spouse is entitled to personal effects, a statutory legacy of $100,000, and half of the remaining assets.  The children are equally entitled to the remainder.  If no provision has been made to pass control of a trust, control will simply pass in accordance with the provisions of the trust deed. The outcome can be disastrous.

As with any succession plan, the process must begin with a review of the assets

Whether solely or jointly owned, owned by a company, trust or unit trust, the company shareholder agreements, the trust deeds, and unit trust agreements, to ascertain how they can be passed, and to whom.

Equally important is a review of the family, and their roles within the business

Family members may own equity; shares for example.  They may also be employed by the business.  Thirdly, they may have a governance role, and act as a director on the board of one or more companies.  Provisions within a family constitution may set out requirements (such as board approval), to ensure that employment is earned on merit.

What if a child may not want to work in the business at all?

This is where early succession planning is crucial, to ensure that wealth is built outside of the business to provide fairly for that child if possible.  Often succession planning is left too late, and there are few assets outside of the business, both to enable retirement, or to provide for a child who does not wish to work in the business.

What if there are no children?

Key employees may be offered the opportunity to attain equity in the business, leading to recruitment of better talent and expertise, and the incentive to innovate to increase profit.  A comprehensive business succession agreement or buy/sell agreement can be put in place, following discussion, documenting how equity (for example shares or units in a unit trust) can be transitioned through options exercisable in particular circumstances, such as death, loss of capacity or ceasing to work full time within the business, at a purchase price calculated using a set formula.

So go ahead and put something in place, stop putting it on hold – you wont regret it.


This Alert is intended as general information only. It does not purport to be comprehensive advice or legal advice. Readers must seek professional advice before acting in relation to these matters.