Is a sale of all or part of the business an option to be considered within the succession process?
This is one of an ongoing series of 10 legal alerts on this topic. This article is the fourth in the series, and follows on from Succession Planning: How to Bring Non-Family Members into the Business, Understanding Business Structures for Succession & Asset Protection and How to Create a Succession Plan.
While business succession can take place successfully and tax effectively after the death of the current owners, while the current owners are alive and retain control of the business, a role in it and an income from it, there are a number of reasons why a lifetime sale of the business should be considered.
Using the example of a wine business, this may consist of the family home, vineyards, a winery, a cellar door, plant and machinery, inventory and perhaps a warehouse, often located in the same vicinity. When the current owners look to retirement, they may wish to purchase a property elsewhere, away from the business, and will certainly need income.
If their non-business income and capital is insufficient to support their retirement plans, the current owners will either need to rely on the business to support them, or consider a sale of equity to family or non-family successors, taking into account tax and duty implications.
If the current owners retire, family or non-family members will need to step partially or fully into the roles of the current owners, with the associated costs. It is often not ideal, from the perspective of either generation, for the current owners to retire and continue to be financially supported by the business. In that case, strategies for increasing the profitability of the business may need to be considered, along with the capacity of the business to support borrowings in excess of those required for the ongoing needs and growth of the business. It may simply not be possible to provide for both the retirement needs of the current owners and the needs of the successors. An option is a sale of all, or part of, the business.
Retirement planning often also forces the current owners to consider which, if any, of the next generation will succeed to the business. There may be one or more children who have worked in the business for a number of years, perhaps forgoing an extended formal education and a significant salary, to safeguard and enhance the value of the family business. Consideration must be given to how that contribution, forfeiture and reliance should be rewarded, and whether, if the intention is to pass the business to the child or children working within the business, the non-business assets are sufficient to adequately provide for the others. If thought is given at an early stage, it is possible in some cases to accumulate non-business assets, not only for retirement, but also for the children who do not work in the business. Where it is not possible to accumulate non-business assets, and the current owners of the business wish to equalise the inheritances of their children as far as possible, they may consider a sale of the business.
If the business is viable, then a sale to a next generation business successor or successors should be considered, either in lifetime, if equity is needed for retirement, or after death by the executors.
If there are no successors within the family, or, for example, two children work in the business, the business could not viably support both and agreement cannot be reached for one to buy-out the other, the current owners may consider a sale to non-family members, perhaps employees or a third party, so that both children can inherit equity to invest in alternative businesses.
A sale may be at market value, or may be at a discounted value to assist with funding or to take account of the purchaser’s contribution to the business. It should be noted that the sale will be deemed to be at market value for tax purposes, regardless of the discount applied. If a sale is being considered, specialist advice must firstly be taken on the stamp duty, GST and other tax implications, and the applicability of available exemptions, reliefs, concessions, discounts and rollovers to reduce, or in certain cases eliminate, these costs. The structure of the business, and whether the business is run by a sole trader, partnership, company or trust, will impact on this advice. The structure will also determine how the business can be transferred legally, perhaps through the sale of the assets of a sole trader, sale of an interest in the assets of a partnership, sale of assets owned by a company or trust, sale of company shares or the transfer of control of a trust.
If it is not possible for next generation successors to raise funds, then part or all of the purchase price could be paid by instalments over a number of years, making provision in the current owners’ wills for repayment or forgiveness of outstanding debts on death. Care must be taken, if vendor’s terms are offered, to enable payments to be spread over a number of years, to take account of when any capital gains tax liability may fall due from the current owners, whether the sums actually received cover the liability and the needs of the current owners, and to ensure that any tax concessions available to the current owners are preserved.
Clearly a sale of all or part of the business is one of a number of options to be considered within the succession process and may, in certain circumstances, be the best option for the family as a whole.
This was originally published in Australian & New Zealand Grapegrower & Winemaker.
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.