Succession Planning from the Inside Out

By John Sier, Principal, Mason Sier Turnbull Lawyers

How will you respond if someone suddenly offers you an enticing amount to buy your entire business? Will you respond differently if your business is a franchise? We consider these and other questions as part of our series on business succession planning.

Every business owner should have a strategy and business plan that sets out how partners or shareholders can exit the business, or how the business can be sold or passed onto third parties. This is widely known as ‘succession planning’.

Last month’s newsletter looked at Buy/Sell Agreements to help manage internal succession when one partner unexpectedly exits a business, usually through retirement, disablement, or death. But business owners should have options available to exit the business at any time, so they are always ready to make the best of any circumstances. This includes being ready to sell the business to a third party.

Succession Planning Checklist

How long since you’ve asked yourself these questions (maybe some of them are new)?:

1. What are your business and financial goals and what is required to reach them?
2. When will your business reach its peak?  And how might economic changes impact it?
3. What should you do when the business is ‘worth all that it can be worth’?
4. What would you do if someone suddenly offered to buy your business? What would your business partners want to do? How would you resolve a partner dispute about whether or not to sell?
5. If forced to sell, how long might it take to sell the business? And would the buyer be an existing employee or independent third party?
6. Are you the key person? What if something happens to you that causes your indefinite absence from the business?
7. Do you fully understand your role and responsibilities, including the characteristics and qualities that enable you to run your business?
8. Could anyone else run the business? Are your systems and processes strong and clear?
9. What risks would a change of ownership or management pose to the business and how can these be managed?

If you answered “unsure” to any of the above, it’s time to add succession planning to your value-adding process.

Pass the Condition Report

An important part of succession planning is keeping your business in a condition in which a third party can, if necessary or desirable, buy it on short notice and favourable terms. We at MST know the daily reality of running a business can make this difficult. But you can ensure your business is sale-ready at all times by:

1. Reviewing your business (or franchise system if you are a franchisor) and addressing issues that might affect its value (e.g. is all intellectual property registered? have you properly documented all material arrangements, including franchise agreements? is your operations manual in order?);
2. Ensuring your management team is skilled and competent and can operate in your absence;
3. Ensuring financial figures and books of accounts are up-to-date and accurate, and, for franchisors,  that you can electronically collect and analyse franchisee financial data;
4. Ensuring you have signed copies of all key contracts and agreements, including any supplier agreements, franchise agreements, licence agreements, leases, etc.;
5. Being aware of the best economic conditions under which you could sell the business or franchise network, rather than simply waiting until forced to sell; and benchmarking your business or franchise network against similar ones.

For advice on succession planning, or getting your business sale-ready, contact John Sier on 03 8540 0200 or john.sier@mst.com.au