It would seem natural that the greatest challenges in a small business arise during the establishment and operation of the company.
Hopefully, most small business owners look forward to the later stage of their working lives as a time for reflection, during which they can enjoy the results of the energy they have put into their companies.
But the latter part of a business owner’s career isn’t all smooth sailing – one of the most important entrepreneurial decisions, that regarding the future of the business in question, needs to be made in this time.
There are a number of options that a business owner can take at the end of their career, according to Joe Lederman, a partner at Baldwins law firm, an Australian practice which specializes in business succession planning.
Among these is the sale of their business.
Lederman says business sale is a complicated area, and one that requires a high degree of planning on the part of the owner before the sale is entered into.
“The process itself has to be taken very slowly and carefully and be carefully strategized because the risk is the business can be destroyed if they give away too much too soon, particularly to their competitors,” he says.
For those who want to ensure that the business’ new owners will have a personal knowledge of the firm’s operations, Lederman says another option is to promote someone who is already in the business into the position of owner.
That person may already have equity in the company, or could acquire an interest in the lead-up to or at the time of the hand over.
In this scenario, planning is also essential to ensure that both the outgoing owner and the new head – who will have already devoted significant time and energy to the company – are provided for.
“It’s a case of looking at how the return can be maximized and at the same time making provision for rewarding those who have worked on the path to success and maximizing the end return for everyone,” says Lederman.
“Sometimes it’s a case of balancing what they want more – do they want income stream or up-front capital?”
One advantage of this approach, Lederman says, is that the business transfer can be staged over a certain period, which might allow the original owner to decrease their involvement gradually.
Of course, sometimes businesses require less attention than others in terms of succession planning. This can be the case with some family-owned business.
“There are family situations where nothing necessarily has to change. The underlying structure might require change or arrangements to be put in place for control to change rather than ownership,” Lederman says.
Another way in which small business owners can retain some degree of control after their retirement is by creating a license for their business.
“That’s often a scenario,” says Lederman.
“You can potentially transform a business from one that has very active hands-on management of all the workings, to a business which … is a generator of a more passive source of income,” he says.
Unfortunately, involuntary succession as a result of death or disability is another contingency that SME owners and their financial planners need to be aware of.
The main way to plan for this possibility is to invest in insurance, which would cover the cost of selling or otherwise dealing with a business whose owner cannot be involved in the process.
“The provisions governing the buying or selling of interest can be funded largely by insurance in those circumstances” says Lederman.
Saying goodbye to a business can also be advantageous, at least in tax terms.
Capital gains tax concessions may be available as a result of business succession, and may include tax exemptions and deferrals.
Another means of potentially minimizing capital gains tax liability is to invest in superannuation, since this represents another concession.
“Anyone contemplating selling a business should also look carefully at their own personal superannuation arrangements to see how that can possibly be restructured in light of what might be necessary to take advantage of capital gains concessions that interplay with the superannuation provisions,” says Lederman.
He adds that accountants should urge business owners to make preparations well in advance in this area in order to be fully aware of the relevant issues.
Copyright 2003, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.