Business Breakfast Club November Summary - Business Succession Planning, Buy-Sell Agreements And Personal Insurances
This month at Business Breakfast Club, Golnar Nekoee of BAL Lawyers and Sam Elliot of Macquarie Wealth Management discussed the importance of business succession planning and how to finance the plan. An effective succession plan will ensure that the time and effort invested in building up a business is not jeopardised when a business owner leaves.
What is a business succession plan?
A succession plan outlines who will take over a business when a business owner leaves. An owner might ‘leave’ for a number of reasons and might be voluntary or involuntary. This might be due to retirement, death, disability, a sale of the business, or a falling out between business partners. Creating a plan ensures that you have a strategy in place for the orderly and smooth transfer of business, aiding to maintain economic stability and preserve family and business relationships. The business succession plan can be built into your establishment and ownership documents or can come later separately but it does need to be discussed with the intended beneficiaries and documented so that it can be implemented in a practical and meaningful way.
Types of succession plans
A succession plan can come in many forms and will depend on the legal model of business ownership you have chosen. Strategies can include Enduring Powers of Attorney, Wills and Statements of Intent for sole traders, Partnership Agreements, Shareholders Agreements and Buy-Sell Agreements where there are multiple owners. It is important to ensure that the succession plan is funded, whether through a loan or an insurance payout, otherwise the plan cannot be implemented.
How can Enduring Powers of Attorney and Corporate Powers of Attorney be used?
An Enduring Power of Attorney (EPA) is a legal document under which an individual (“the principal”) appoints another to make decisions on their behalf (“the attorney”). Decisions can include managing an individual’s property, financial and health affairs. An EPA is a simple but powerful document as it continues to operate after the principal loses the ability or capacity to make decisions. This can be a useful tool in the case of a sole trader, allowing the attorney to make not only personal decisions but business decisions to either manage the business until the principal regains capacity, or to sell the business or conduct an orderly winding down in the event the principal no longer has capacity.
Directors however cannot give an EPA in respect of their role as a director; hence a company power of attorney might be appropriate for sole director / shareholder entities.
If a sole director and shareholder of a company is incapacitated or has passed away, there is a period of time in which no one can exercise the rights attached to the shares (to appoint an interim director) and the company will be without appropriate management and oversight. The company will be unable to operate effectively (or perhaps at all). In order to allow the company to continue to operate (for instance use bank accounts to pay wages or debts, enter into contracts to preserve the business) a sole director might consider, as part of their succession plan, implement a company power of attorney. The company power of attorney can grant a third party the right to exercise the powers of the company – allowing that third party to step in and manage the business at a critical time.