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HIRE AND RENTAL NEWS • AUGUST 2015
INDUSTRY in FOCUS
By law firm - Bartier Perry
Benjamin Franklin said “If you fail to
plan, you are planning to fail.”
It is unlikely the success of your
business has come about by pure
luck. Business owners have a vision
and most successful businesses
will have a ‘road map’ to put their
business on the path to success. The
‘road map’ alters as changes happen,
some of which can be planned such
as growth, location, products and
distribution. Some changes are forced
on businesses such as technology
and changes to the law and some can
strike at any time such as incapacity,
illness, and death.
Picture this:
• you have a successful business
and have recently implemented an
expansion of your business;
• you receive a call from the spouse of
one of your business partners to let
you know your business partner has
just been admitted to hospital with a
brain bleed and has been placed in an
induced coma;
• unfortunately your business partner
does not recover and dies the next day;
• the spouse of your deceased business
partner is left with three young children
and does not work, nor do they have
the skills or the desire to be involved in
the business so they want to be paid
the value of your deceased business
partner’s share of the business;
• you and the other business partners
discussed succession planning and did
arrange life insurance but never got
around to finalising any documentation;
• you discover the life insurance policy
owned by your deceased business
partner will be paid to their estate and
their share of the business has been left
to their spouse.
The events have happened so quickly and
the demands of your deceased business
partner’s spouse are taking their toll on
the business. You and your other business
partners are starting to lose focus on the
business which is evident by complaints
coming in from your customers. Your
suppliers are a little anxious because you
Planning for the succession of your business
– is it as simple as hanging out the shingle?
have not paid your accounts on
time.
You and your other business
partners are worried about:
• how are you going to buy out
the spouse of your deceased
business partner;
• how can you ensure the
business continues to prosper
as planned; and
• what happens to the business
and its employees if it cannot
recover following the death of
your business partner?
You and your other business
partners pull out the draft
agreement you had prepared a
couple of years ago which sets
out precisely what happens in the
event one of the business partners
suffers loss of legal capacity, has a
prolonged illness, or dies.
Had the agreement been finalised,
the tragedy of the death of a business
partner would not have been avoided
but, the life insurance paid to the spouse
would have represented in full or part the
value of the deceased partners share in
the business. The draft agreement did set
out a methodology to value the business
and undertakings by each of the business
partners to increase life insurance to keep
the amount in line with the value of the
business. It also set out a payment plan
to the estate of a deceased partner in
the event the proceeds of life insurance
were less than the value of the deceased
partner’s share in the business.
Having a succession plan which covers
what happens when there is an involuntary
departure from the business (incapacity or
death), a voluntary departure (resignation),
the admission of new business partners,
and passing control of a family operated
business to the next generation is as
important as having the vision and ‘road
map’ to grow a successful business. In
fact it might be argued a succession plan
is more important as death, disability, and
retirement can all result in major disruption
to a business which could ultimately lead
to a failure of the business.
Nearly every day there is an article in a
newspaper or some other form of media
which relates to ‘succession’ whether it
be AFL team Richmond Tigers succession
plan for the departure of Alex Rance, the
chairman of Samsung suffering a heart
attack in May 2014, or the succession of
the Frank Lowy empire.
The time to have a succession plan is
when the business is beginning to show
profits and is over the start-up phase
(generally after five years). Failure to have
a business succession plan can have
massive implications for a business.
What is a business succession plan?
A business succession plan needs to deal
with several things including:
• Death
• Disability; and
• Retirement.
The plan also needs to consider the
structure of the business; ie: partnership,
discretionary trust, unit trust, company, or
a combination of structures. The control
of the business needs to be carefully
considered and how that control is passed
on the happening of certain events.
A simple example of control falling into the
wrong hands is:
• the family business is operated in a
discretionary trust which was set up by
the parents who both control the trust;