Business succession – The current state of play

It is important for all businesses to have a succession plan or exit strategy for their owners.

There are a number of factors that need to be considered in determining the best exit strategy for business owners including, what industry does the business operate in? is there more than one principal? can the business operate independently of the principals? what type of purchaser would offer the principals maximum value for the business? and so on.

In his paper, ‘Business succession – The current state of play’, presented at the recent South Australia Succession Planning Day, Michael Chrisohoou, CTA, looked at the key elements of a Buy-Sell Agreement, common structures for such agreements, and many of the issues and considerations involved.

Michael’s paper, excerpted in this post, noted that some of the possible options for exit include:

  • engaging in a competitive sale process through the assistance of a corporate advisor or business broker. This may ultimately result in:

- offering the business to the market at large or a select group of targeted buyers;
- a sale to a private equity/venture capital fund; or
- a sale to a competitor;

  • selling the business to existing employees including through a management buyout; or
  • listing through an initial public offering or back-door listing.

A Buy-Sell Agreement can be a very important succession planning tool when used in the appropriate circumstances.

Broadly, a Buy-Sell Agreement is a document that deals with the transfer of ownership interests between one or more existing owners of a business on the occurrence of one or more specified events – often referred to as ‘trigger events’.

They are:

  • most appropriate where a business is owned by two or more principals that are actively involved in the business; and
  • useful in providing business owners and their estates with certainty around what will occur with their ownership interests if an unexpected event occurs in relation to one of the principals.

This certainty is desirable:

  • from the perspective of the continuing principals, in knowing that they will be able to acquire the interests of an outgoing principal, avoiding the situation of being left with:

- a business partner that is no longer able to contribute or the business; or

- a business partner’s estate, who the continuing partners may not wish to have an ongoing relationship with and/or who may not possess the necessary skills to contribute to the business; and

  • from the perspective of the exiting principal or their estate, as they have certainty that they will be able to ‘cash out’ of the business at a pre-determined price or valuation methodology.

Buy-Sell Agreements can be used for a range of business structures, including where a business is structured through a company, unit trust or partnership. However, Buy-Sell Agreements cannot be used where a business is structured through a discretionary trust.

There are a number of ways that a Buy-Sell Agreement can be structured - there is no ‘one size fits all model’. This paper explores some of the common structures used in Buy-Sell Agreements and highlights some of the taxation and commercial considerations that arise in each.

Preparing a Buy-Sell Agreement involves the input of a number of advisors. This can typically include:

  • the business’ accountants who understand the business’ finances;
  • one or more sets of lawyers. A lawyer needs to prepare the Buy-Sell Agreement. Separate lawyers may also be required to represent each of the business owners as well as to represent the relevant company or unit trust; and
  • a financial planner or insurance broker to arrange insurance (for Buy-Sell Agreements funded through insurance).

The paper goes on to look at some of the most common ways in which Buy-Sell Agreements can be structured, namely; Continuing Owners as purchasers: Own Policy; Continuing Owners as purchasers: Cross-Insurance; Business Structure as purchaser; or through a Trust Model. It finishes by looking at some further considerations.

Michael's paper concludes that Buy-Sell Agreements can be critical succession planning tools in certain circumstances.

They are generally most appropriate for businesses structured through a company, partnership or unit trust where there are multiple owners actively involved in the business. They provide certainty and a clear exit opportunity in circumstances where an unforeseeable event occurs in relation to a business owner such as death, TPD or trauma.

In his view, there is no ‘one size fits all’ model for Buy-Sell Agreements. Notwithstanding this, there is often good logic in structuring a Buy-Sell Agreement using put and call options, using insurance as the funding mechanism under the Buy-Sell Agreement, and considering structuring the Buy-Sell Agreement with the continuing owners as purchasers and with each owner holding their own insurance; and being careful when using superannuation to hold insurance policies.

Michael points out that, in his experience, preparing a Buy-Sell Agreement that best suits a client’s particular circumstances is a multi-disciplinary effort. It involves assembling a team of suitably qualified and experienced lawyers, accountants and financial planners/insurance brokers that understand the client’s objectives, the various structuring options and regulatory constraints.

The paper is available to view here.

Michael Chrisohoou, CTA, is an experienced commercial lawyer who works closely with business owners and their accountants to provide commercial and pragmatic advice. His background in tax, as well as his transactional and broader commercial experience enables him to provide specialist structuring and restructuring advice to clients. Michael’s experience includes acting for clients in the pharmacy, real property, agriculture and manufacturing industries.


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