Part 1 of this series of articles dealt with the need for early implementation of a range of succession strategies rather than simply relying upon a clause in your Will. This article deals with specific succession and transition situations and provides suggestions which will facilitate stakeholders (the outgoing and incoming parties) enjoying win-win outcomes. If these situations are poorly managed, personal relationships may be jeopardised and commercial opportunities lost.
- Asset sale
If the transition/succession is seen as merely an asset sale or transfer, the process may be relatively straightforward. Liken this to a traditional sale of business. Transition can be achieved pursuant to the Will upon the death of a sole trader; during his or her life, or at the election of the "controllers" of the family trust, company or partnership. (See article 1 in this series: Business succession and exits: is the Will enough?)
An asset sale is more likely to attract significant practical issues, for example, licence transfers, lease assignments or other major contract approvals.
There will also be a number of resultant taxation issues such as (stamp) duty, capital gains tax and GST.
- Control of ownership
If you have a family trust, partnership or company, and the transition or succession is to a related party, an effectively drawn transition strategy can minimise operational disruption and adverse taxation consequences.
- Sole trader
A sole trader can transfer assets through his or her Will or, more comprehensively, enter into arrangements before his or her death (to take effect on death), by way of an option or even a management-type agreement.
- Partnership
A partnership should have a (written) agreement that sets out all key agreements between the parties. An opportunity exists within this document to design transition arrangements to suit each partner's circumstances.
- Company
Transition for a company is effected by transfer of shares. Whilst the company constitution sets out basic rules in this respect, shareholders should consider entering into a shareholder agreement (which has many similarities and clauses to a partnership agreement).
- Family (discretionary) trust
Transition to a family member under a family trust can be effected through the offices of the trustee and the appointor. Once again, careful planning by amending the relevant provisions in the trust deed will achieve the desired results.
- Combination
Many business structures utilise a combination of the above (eg, corporate trustee of a family trust which is a partner in a partnership), resulting in the need to create an overreaching document or documents to bring these different elements together.
- Taxation
An essential element of any transition or succession exercise is managing the taxation consequences: (stamp) duty; capital gains tax and GST. The most effective outcome will be achieved by long-term planning, willing parties and professional advice.
Conclusion
Having a plan in place to transition your business will inevitably result in a better outcome than where there is no plan.
In some circumstances, a straight sale of assets will be the way to proceed – so long as the practicabilities and tax consequences are well managed.
Often, however, and particularly if the new owner is a related party, a change in control will be the optimum mechanism to achieve this transition.
The third article in this series will address the legal aspects of readying your business for sale (or operating it better now).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
