An Introductory Guide to Family Business Succession 

As tax accountants we are often asked by our clients across Perth – What do I need to do for my business succession plan? 

Understanding what is a family business 

It is also fair to say that most family businesses do not consider the business to be a “family business” – either in Perth or greater Australia.  At Westcourt when asked the question “what is a family business” we define a family business as a business that can be operated by the next generation without the express need for the next generation to be working. 

In effect a family business is a business that can be run under management.  And this is important for a family business in that in order to create succession of the family business the next generation must want to run the family business. 

If your business does not make money.  If it requires massive hours to keep it working.  If it places unfair lifestyle obligations on the owners.  And if it puts the family assets and health at risk – it is to be expected that the next generation will simply not be interested in talking about the family business (let alone any succession plans you might imagine for it). 

So increasing your forecast cashflow, simplifying process through cloud accounting, and looking at asset protection is important for succession.  

For a wealthy family running the investment pool becomes a family business.  If you own say – 9 shopping centres – the active management of the property portfolio, managing relationships with agents and advisors and understanding the asset becomes a full-time business.  So while investment advisors and financial planners do a great job for middle-wealth families in simplifying their affairs – higher net wealth families are still actively engaged in running the family office.   

And the family office becomes the family business.  

What does family business succession mean to you? 

If you run a family business and the business is profitable; and the business can be run under management; and the business generates a safe and secure ongoing dividend stream – then the succession even might simply be putting in a family council to oversea the CEO and continuing to run the business.   

If the emotional connection to family business, as a founder, is so strong that you cannot let go of the family business – then succession of the family business might simply be running the business long term in retirement by the founders. 

If the founders of the family business need money to retire – then the succession of the family business can become a sale event.   

And if the second generation simply do not have the inclination to be engaged with the family business, or if the business needs a large cash injection, then a sale event might be succession.  Of course this transaction can simply change the nature of the family business from one from of business to another (the family office). 

So the end answer is that family business succession means different things to different people.  And engaging in a meaningful discussion with your tax accountants, lawyers, business advisors and SMSF advisors as to what succession means to you is critical (sometimes as a couple this discussion is also needed  – and using somebody like Westcourt to facilitate this is a good starting point). 

Planning for succession 

The process of planning for succession is a lifelong journey.  And many great founders of a business have a strategy for eventually creating succession when the family business was a start-up.  Normally the business succession plan for a family business is an important part of the business plan.  

If you are planning for family business succession you should ask: 

  • When 
  • Who 
  • How 

When should I succession my family business? 

As a business owner the importance of making the family business an attractive proposition to the next generation is important.  If you improve the profit yielding capacity of your business the next generation will be more interested in it.  And if you improve the sustainability of profits within your family business the next generation will be more interested. 

So undertaking activities like cashflow forecasting, independent boards and adopting technology to automate your business process will not only make more profits for your family – it will increase the likelihood of creating a succession event for the family.  Even finding ways to protect your business from rampant inflation will help in succession.  

So succession starts now with making the business more profitable.  And if you get the business sale ready you stand a better chance of achieving a business succession.  

It also starts with conversations now.  And the earlier a conversation happens on succession the better.  The conversation starting now does not need to be lengthy but it should be professional.  Understanding the retirement goals of your spouse, expectations of children (and yours to them) and also understanding what you are looking for as an end event are important and sometimes difficult pieces – and Westcourt, as a single focus firm, has deep experience and knowledge in these type of conversations.  

It is also important to note that business succession planning is not estate planning.  While estate planning is important it concerns your death (or incapacity) while business succession planning for your future Perth life is for when you are alive.  

Who should I transfer the business to? 

If you are going to create a succession event in your family business your options are limited.  You can either sell the business to the management team (which could include running it under management with an outsourced CFO), sell the business to an outsider or sell the business to a third party. 

If you are looking at selling the business to your management team or to the next generation you have some smart tax structures available to you.  You could consider engaging in flowering shares, employee share plans, employee share loan plans, leveraged debt backed by vendor loans or family charters. 

Importantly the decision to transfer a business to a person at the exclusion of another carries a message.  So having frank discussions with every family member, and using a family business advisor to support that, will hopefully stop future tension that can derail a family business succession plan. 

If you do intend to succession the business to the next generation the preparation time can be significant.  If you were planning on selling the business to an outsider as opposed to your team or family – the work involved, and the advice involved, is about the same. 

How should I transfer the business? 

The act of creating the “how” of a succession is the bread and butter of a tax consulting firm like Westcourt.  And while we appreciate that tax is important it is not the only factor.  Properly dealing with ASIC, the Office of State Revenue, the Foreign Investment Review Board and (most importantly) the extended family members and employees can often be more important than just tax.  So dealing with a firm like Westcourt with one focus is important to generate the best outcome. 

At Westcourt we have used a combination of family charters, management plans, employee share plans, phantom share plans, business sales and LTI and STI incentive schemes for incumbent family members – together with deeper conversations across the extended family to create amazing outcomes.   

And all of this must still come with the recognition that the family business needs care and love.  If the family business is not making money the succession discussion can often become irrelevant. 

How do I start? 

Like most things in business – family business succession starts with a conversation.  It is normally with your trusted tax accountant or business accountant about what you really want and hope to achieve.  And the conversation could either then includes your spouse a the starting time or it might involve the spouse after the founder of the family business truly understands what they want. 

That conversation can branch into many areas.  It might need a detailed strategy to increase the cashflow of the business.  It might need a strategy to separate the business wealth from the family wealth (maybe through a SMSF).  It might need a strategy to consider repositioning bank debt and clear the family home away from the business.  It might be identifying the current asset pool for retirement and collaborating on strategies to facilitate that.  Or it might be a strategy to improve the systems and controls that are in place when multiple family members are accessing the profits. 

Regardless of the direction of the succession it is important to remember the power of the conversation – to your family, your team, your spouse and yourself.  Planning to transition the business, through a multitude of options, always involves work and negotiation.   

At Westcourt we have one focus – founder led families in business.  And learning from experience (not mistakes) will have the best chance of creating a great succession event for your family.  Given our single focus, our agile independent advisory status, and given our deep proven tax expertise in family business we are a natural choice for founder led families in business that want to succession to the next generation – So why not give us a call? 

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