Business Succession Planning: How to Plan Your Exit

Every business owner leaves their business one day. The only question is whether it happens on your terms. Business succession planning is the process of deciding how, when and to whom you will hand over your business, and then preparing the business, your structure and your family for that change.

Done well, a succession plan can increase what you walk away with, reduce the tax on exit and protect your family if something unexpected happens. Done badly, or not at all, it can leave you with a business nobody wants to buy. This guide walks through the main steps for Australian business owners.

Why business succession planning matters

Many owners put succession off because retirement feels a long way away. However, a plan isn’t only about retiring. It also covers what happens if you become ill, a partner wants out, or a buyer turns up sooner than expected.

Without a plan, you may face:

• A rushed sale at a lower price.
• Avoidable capital gains tax because the structure wasn’t ready.
• Disputes between business partners or family members.
• A business that falls over once you stop turning up.

In contrast, owners who plan ahead usually have more options and more control over the outcome.

Your succession options

There is no single right exit. The best option depends on your goals, your family and the business itself. The most common paths are:

Selling to an outside buyer

This could be a competitor, a larger group or a private investor. It often gives the best price. However, buyers will look closely at your financials, your systems and how much the business relies on you.

Passing the business to family

Handing over to the next generation can keep your legacy alive. It also raises tricky questions. For example, how do you treat children who work in the business fairly against those who don’t? Clear agreements and early conversations help avoid conflict.

Selling to staff or management

A management buyout can suit owners who want continuity for clients and staff. Because staff rarely have the full purchase price, these sales are often paid over time, so the terms need careful thought.

Winding down

Sometimes closing the business and selling the assets is the right choice. Even then, planning the timing and structure can make a real difference to the tax you pay.

Steps in a business succession plan

A good succession plan usually takes three to five years to put in place. That sounds like a long time, but most of the work also makes the business better to own in the meantime.

1. Get clear on your goals

Start with what you want. When do you want to step back? How much do you need from the business to fund the next stage of life? Do you want to stay involved? Your answers shape every other decision.

2. Understand what the business is worth

Many owners have a number in their head that doesn’t match what a buyer will pay. A realistic valuation gives you a starting point and shows you what to improve. Clean, reliable numbers are essential here, and our guide to understanding your revenue and profit is a good place to begin.

3. Make the business less reliant on you

If every client relationship and decision runs through you, the business is worth less to anyone else. So build systems, develop your team and document how things are done. We cover this in detail in how to build a business that runs without you.

4. Review your structure early

The structure that suited you when you started may not suit an exit. Selling shares in a company is different from selling assets held in a trust, and each has different tax results. In addition, loans between you and your company, such as Division 7A loans, often need to be cleaned up before a sale. Changing structures can trigger tax too, which is why this step needs to happen years before you sell, not months.

5. Plan for capital gains tax

The small business CGT concessions can significantly reduce, or even remove, the tax on selling an eligible business. They include the 15-year exemption, the 50% active asset reduction, the retirement exemption and the rollover. However, the eligibility tests are strict. Our article on small business CGT concessions explains who qualifies, and the ATO’s CGT concessions guide has the official detail.

6. Protect against the unexpected

A succession plan should also cover death, illness and disputes. For business partners, this usually means a buy-sell agreement, often funded by insurance. It also means up-to-date wills, enduring powers of attorney, and clear control of any family trust, including who the appointor will be. Our guide to asset protection for business owners explains how these pieces fit together.

How to increase value before you exit

The years before a sale are your best chance to lift the price. Buyers usually pay for profit they believe will continue after you leave. So focus on the things that make that profit more reliable:

• Steady, growing profit over several years, rather than one strong year.
• Recurring revenue, such as contracts, retainers or repeat customers.
• A capable team that can run day-to-day operations without you.
• Tidy financial records that make due diligence quick and simple.
• Lower tax leakage, so more of the profit ends up in your pocket. Our guide to business tax minimisation strategies can help here.

Succession planning for family businesses

Family succession brings extra challenges. Emotions run high, and fairness doesn’t always mean equal. Here are a few practical tips:

• Talk early and openly with everyone affected, not just the child taking over.
• Separate ownership from management. A child can run the business without owning all of it, or the other way around.
• Agree on a fair price and payment terms, even within the family.
• Put agreements in writing, then review them as circumstances change.

Common succession planning mistakes

The biggest mistake is leaving it too late. Others we often see include:

• Overestimating the value of the business.
• Missing out on CGT concessions because the structure wasn’t ready.
• Having no plan if a partner dies or becomes unwell.
• Relying on an accountant who only looks at last year’s tax return.

If your accountant has never raised succession with you, that may be a sign you have outgrown your accountant.

Next step: start your succession plan with a Business X-Ray

The earlier you start business succession planning, the more options you have. At Venta, we help owners understand what their business is worth, what needs to change, and how to exit with as little tax as the law allows.

Our Business X-Ray is the best first step. We review your numbers, your structure and your goals, then map out a clear plan. Book your Business X-Ray today.

FAQ: business succession planning

When should I start succession planning?

Ideally three to five years before you want to exit. That gives you time to improve profit, reduce reliance on you and get your structure ready for the CGT concessions.

Can I sell my business without paying capital gains tax?

In some cases, yes. If you meet the eligibility tests, the small business CGT concessions can reduce the tax significantly or remove it. Whether they apply depends on your circumstances, so get advice well before you sell.

What is a buy-sell agreement?

It is an agreement between business owners that sets out what happens to an owner’s share if they die, become disabled or leave. It is usually funded by insurance, so the remaining owners can afford to buy the share.