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Legal Issues Behind Succession Planning In Business

If you fail to plan, you plan to fail.

That’s one of my favorite quotes because it shows what owning a business is all about.

Succession planning is an important and necessary part of the overall business strategy of your organization. It can protect the business in the event of a divorce, retirement or passing of one of the key owners or executives of the business.

In short, succession planning is deciding what happens to the business after the owner is not around any more. There are many aspects of this plan but today we are looking at the legal ones.

Yes, as everything else in a legitimate business your succession plan needs to be dates, signed and stamped legal-proof folder.

If you are a business owner who does not plan to fail, then your succession plan should address these legal issues:

1.     Successor’s name

Succession plans usually cover death, divorce or retirement issues but in extreme situations such as kidnapping, natural disasters shouldn’t be ignored either. Naming a successor makes sure that the business will not be taken over by an incompetent person. If the name of the successor is not included in succession planning documentation, the courts will have to decide on that.

Not naming a successor might lead to disputes and finally closing of the business.

2.    Property distribution

If any of the business property is on the previous owner’s name, this should be addressed. Imagine your company car ending up with your family and not in the business.

Property distribution is important because a business owner might also want a part of it to stay in the business, but another may wish it to be given to their family or stay with them for retirement.

3.    Business structure

Each business structure requires a different succession plan. Company structures have a formal way of succession planning that can be explained by your company lawyer. While for sole traders and partnerships, the owners and managers can take decisions on succession rather freely, when there is a board of directors, things are a little more complex.

If you are preparing a succession plan for your company, you can best protect your interest by hiring a qualified lawyer.

4.    Tax issues

Any outstanding taxes, debts, or unfinished business must be resolved before the succession takes place. Otherwise the successor inherits debts that they have nothing to do with them (especially in sole trader and partnership structures).

The management of finances should be addressed in the succession planning documentation.

5.    Benefits

Succession planning is necessary not only in cases of emergency but when the owner/management decides to retire as well.

The decision here is whether the owner or manager will continue to receive benefits after they have left the company and what will they be. This is the time to decide on a retirement package.

6.    Employment contracts

The issue with employees in succession planning is important. Employees might decide to follow a manager or leave the company when one of the partners does.

The protection and loyalty of employees must be guaranteed. They should feel secure that their contracts and arrangements will be honoured.

Succession planning is a necessity for every business that wants to last. Do not hesitate to settle on an exit strategy while you are still able to take the decisions.

Do I need a lawyer to help me with succession planning?

If you have an internal company lawyer, they will be able to advise you on the best practices related to your business structure. However, if you don’t have an in-house lawyer, you will need to find an experienced one to assist you in making sure your succession plan is supported by the law and does not break any regulations.

Not sure if you need a succession plan? Contact us at +61 (2) 9615 9635
or [email protected] for a consultation with Katherine Hawes who has over 20 years of business law experience and can help you take the right decisions to protect your company.