Entering the Business Succession Planning Maze – A Guide for New Players
Entering the Business Succession Maze – An Introductory Guide for New Players
Material we will cover today
• A case study or two
• Purpose and value of business succession planning
• Common obstacles to engagement
• The business succession planning process
• Horses for courses – different approaches to business succession planning
• Parties
• Trigger Events
• Rights & Obligations
• Valuation issues
• Funding issues
• Drafting the agreement
Entering the Business Succession Maze – An Introductory Guide for New Players
A case study or two
• The good
• Hobart-based industrial supplier
• Employee transition
• The bad
• The ugly
• Devonport-based farming family
• Caveats & constructive trust
• Supreme Court & Federal Court proceedings
• Time, cost & stress
• All they wanted was a good business succession plan!
Entering the Business Succession Maze – An Introductory Guide for New Players
Purpose and value of business succession planning
• Purpose
• Document a clear and certain transition of equity
• Safety net position (just in case)
• Specific elements
• Legal purposes
• Practical purposes
• Value
• You need to be able to sell the value proposition of business succession planning
• Certainty
• Exiting party
• Continuing parties
• Peace of mind
• Can they (the client) afford not to?
Entering the Business Succession Maze – An Introductory Guide for New Players
Common obstacles to engagement
• Generational pride
• Cannot/will not hand over the reins; no-one else can do it as good as me
• Time poor
• Too busy working ‘in’ the business to work ‘on’ the business
• Perceptions about needs
• Use a war story or two to
• No viable succession plan
• This is a difficult one
• Cost–benefit analysis
• Value vs cost
• The ostrich approach
• Use perseverance
Entering the Business Succession Maze – An Introductory Guide for New Players
The business succession planning process
• Step 1 – Initial meeting
• Step 2 – Family (or owner) meeting
• Step 3 – Proper instructions
• Step 4 – Engaging with other advisers
• Step 5 – Drafting
• Step 6 – Review with client and other advisers
• Step 7 – Finalise and sign
• Step 8 – Put it into action
Entering the Business Succession Maze – An Introductory Guide for New Players
Horses for courses – different approaches to business succession planning
• There is no ‘one size fits all’ solution
• Bespoke, tailored, unique, every time
• Three possible approaches
• Short-form
• Medium-form
• Long-form
• Three scenarios
• Family
• Employee
• Unrelated owners group
• Terminology issue
• Business Succession Agreement => Buy/Sell Agreement
Entering the Business Succession Maze – An Introductory Guide for New Players
Parties (Who)
• Principals (natural persons)
• Partners
• Business entity owners
• Partnership
• Company
• Trust (discretionary and fixed)
• Other
• Related entities
• Stakeholders
• Spouses/life partners
• Three musketeers (all for one or one for all)?
• How parties are included in the Agreement, including jurats
• Due Diligence
Entering the Business Succession Maze – An Introductory Guide for New Players
Trigger Events (What)
• Certain vs contingent events
• Sale of Business Agreement vs Business Succession Agreement (proper)
• 3 types of trigger events
• Insurable
• Death
• Trauma
• TPD
• Retirement
• Voluntary
• Involuntary
• Non-insurable
• Matrimonial breakdown
• Bankruptcy
• Dependency
• Capacity
• Other impairment
Entering the Business Succession Maze – An Introductory Guide for New Players
Rights & Obligations (How, When)
• Granting of options
• Put options
• Call options
=> reciprocal put & call options
• Dealing with pre-emptive rights
• ‘Wait and see’ period
• Heart-attack example
• Conditions precedent to formation
• Business succession agreement must be conditional on a trigger event occurring
Entering the Business Succession Maze – An Introductory Guide for New Players
Valuation issues (How much)
• Valuation methodologies
• Industry driven
• Actual valuation vs formula (or methodology)
• Different methods
• Multiples of future maintainable earnings method
• Discounted cash-flow method
• Net asset position method
• Entry cost method
• Liquidation (fire sale) method
• Specialist function
• Engage with client’s accountants (do you know what EBITDA is and why it is relevant?)
• Independent business valuation may be required
• Discount rate
• Good leaver vs inconvenient leaver vs bad leaver
Entering the Business Succession Maze – An Introductory Guide for New Players
Funding issues (also how much)
• Alternative strategies
• Insurance funding financing
• Vendor financing
• Bank financing
• Business (cash flow) financing
• Individual financing
• Amount required
• Clean break theory
• Issues arising
• Insurance issues
• Commercial reality – PWL example
• Cash flow management
• Independent insurance proceeds trustees
Entering the Business Succession Maze – An Introductory Guide for New Players
Drafting the agreement
• Arguably, your most important part of the task
• Comments about precedents
• Starting point only
• Make the precedent fit the instructions, not the instructions fit the precedent
• Not all precedents are created equal
• Review by advisers
• Review by client
• Often results in more questions!
A collection of other issues
• Interaction with existing constituent documents
• Stapling of interests
• Tax outcomes
• CGT
• Duty
• GST
• Releases (creating a clean break)
• Legal vs practical
• Value adding
• Personal estate planning
• Others
Late breaking considerations
• Notes from the 2024 Tax Institute Tax Summit (11-13 September 2024)
• Be aware of the lifespan of entities – business succession may need to deal with the expiry/vesting of existing trusts
• Beware of UPEs and loan accounts
• Be aware of any capacity issues
• Trusts
• Read the Deed… and understand it
• Make sure you know what the Deed is (consider amendments/variations etc)
• A-B-C
• Assume nothing
• Believe no one
• Check everything
Entering the Business Succession Maze – An Introductory Guide for New Players
Conclusions
• Do not take on this work lightly
• It is critically important
• It has potentially enormous ramifications
• You need patience of a Saint and the determination of Hercules to see it through
• Can be like herding cats
• You may need to be a pseudo-counsellor
• Work closely with client’s other advisers
• Especially the specialist tax advisers
• Enjoy it
• It is a very satisfying and rewarding area of law
Entering the Business Succession Planning Maze –
An Introductory Guide for New Players
Matthew Pawson
19 September 2024
Introduction
As a commercial lawyer, I have been working and advising clients in the business succession planning space for over 20 years. In that time, I have seen a vast and complex array of businesses, clients, families and circumstances, but all with a common thread: namely, that they would greatly benefit from effective business succession planning However, there is also a fairly consistent theme that arises, which is that when talking to these clients about the importance and value of business succession planning, the clients commonly report that they are ‘too busy working in their business to work on their business’. I am sure that is a theme, or a response, that many of you have heard.
Business succession planning is definitely one of those important strategic planning items that fits into the category of ‘working on’ the business. Business owners – our clients – ignore it at their peril. Regrettably, however, and for a myriad of reasons, there are also many business owners that either do not know about, do not understand, do not want, or do not want to pay for, an effective business succession planning process, potentially leading to disastrous consequences if a trigger event occurs.
Perhaps the most important thing I have learned over all that time is that an effective business succession planning process must be a bespoke, tailored, customised exercise Even with a solid base model (precedent) there is no one final solution that fits every situation. As lawyers, we customarily use precedents to work more efficiently. We must always, as I often say, ‘make the precedent fit the instructions.’ No two clients are the same, nor in the same circumstances, nor have the same intentions, nor the same desired outcomes from this process. Of necessity, this requires us to always undertake specific and customised drafting, once we have all the necessary instructions from the client. For me, this is certainly one key aspect that makes the business succession planning process not only effective for the client, but also enjoyable, challenging and rewarding, as a drafter.
By way of introduction, this paper is written almost exclusively from my own personal experience and observations, focusing on practical aspects from an advice and drafting point of view. I have purposefully tried to keep it light and (hopefully) interesting, and in a conversational tone. I have not quoted legislation, case law, tax rulings etc. In that sense, it is intended as an informal paper, rather than professional, peer-reviewed publication. With that background, the primary purpose of this paper is to present an introduction to a range of relevant issues in the business succession planning space, principally aimed at early career lawyers, or even more experienced lawyers, who are considering entering into the space of business succession planning advice. No doubt, if you are serious about working in this space, you will undertake your own further research and investigation about what is required, and about the relevant legal and commercial aspects that you need to consider. This paper is merely a guide to get you started on that journey.
Commencing with some actual client case studies highlighting the risks (in the first instance) and benefits (in the second) that arise in the business succession space, this paper explores the main issues that advisers need to consider and advise on when assisting clients in the business succession planning space. It discuss the common obstacles that clients face and potential strategies to overcome them. It also explore the key elements of an effective business plan that need to be considered both by the clients and the advisers. I advocate for a broad, inclusive process, engaging with the client’s accounting, financial and other advisers, as required, to elicit the best outcomes for the client. I also offer my own commentary and observations along way for your consideration Hopefully it will leave your interest piqued in this fascinating and rewarding area of the law.
1. A Case Study for Effective Business Succession Planning
1.1 In May 2013, three brothers entered my office in Devonport and asked me about lodging caveats against a number of properties owned by their parents and some related trust entities, all controlled by their parents. My initial thought was ‘oh, this will be interesting….’. It transpired that the three brothers, all in their 30’s at that time, had been working in the family farming business for over a decade and they were, between them, substantially the backbone of what that family farming business had become – a $20mill plus enterprise employing over 100 people (seasonally). However, because of various circumstances, but in particular, may I say, certain character traits of the parents, none of the brothers really had anything to show for their efforts over the prior two decades. The parents (as business partners and trustees) owned everything and the controlled everything Whilst the family was (at that time) relatively close, the parents ruled the family with an iron first, as it were. The brothers, all at various stages of marriage and with families of their own, had worked in the family business for little or no wages for their whole adult lives; were not ‘allowed’ to own assets in their own names (not even their own cars); and had to contribute everything they had to the ‘family business’. In reality, this was the asset pool of the parents. Whilst, certain representations about business succession and inheritance had purportedly been made, the long-promised agreement by the parents to prepare and execute a business succession plan had been repeatedly deferred, avoided and even dishonoured
1.2 It soon became readily apparent that the real course of action that the clients had was a constructive trust claim arising from many years of contribution, service and sacrifice to the parents and the family business. After a commercial negotiation process failed to deliver a satisfactory (or any) outcome, our clients commenced an action for removal of the parents as trustees of the related trusts in the Supreme Court of Tasmania and a declaration of constructive trust in the Federal Court of Australia. It took a long time and a fair amount in legal costs, but they were successful in both actions, ending up with orders appointing an independent trustee to the trusts, and a declaration of a fixed interest in 20% each (total of 60%) of the net equity of the trust entities.
1.3 There is much more to this story – the clients’ issues did not end there. The matter has been the source of 5 or 6 separate legal proceedings in both the Supreme Court of Tasmania and the Federal Court of Australia. The constructive trust decision has been cited in proceedings in South Australia and used as a case study at a National Convention of The Tax Institute. The clients’ claims against the parents (costs) and the independent trustee (damages) continue. Legal costs to date for our clients alone have exceeded $1mill. However, those are stories for another day, and another paper. As this paper is about business succession planning, it is not appropriate for me to waste too much space with the details of all those matters I have fluctuating intentions to write a book about it when I retire!
1.4 At the root of it all, however, is business succession planning! All our clients – the 3 sons –really wanted (and would have settled for) was for the parents to enter into a binding business succession plan, as they said they would. I do not know whether it was pride, arrogance, ignorance or ambivalence, but they (the parents) have certainly paid an enormous price for failing to properly engage in the business succession process and to see it
through. They lost their business, they lost many of their real property assets, and they lost their family. The parents’ 5 children (3 sons – the clients – and 2 other daughters, with collectively about 25 grandchildren) are all now, understandably, estranged from them.
1.5 To round out the scene, I am relieved to contrast the first case study with a ‘business succession planning well-done’ story. Another business client, based in Hobart, and a different scenario. In this case, two long-established directors of a successful industrial supplies business wished to enter into arrangements with a key employee to bring the employee into equity in the business and to set out a smooth transition process to facilitate their subsequent retirement. Admittedly, it took longer than it should have – 18 months, instead of 6 – but they got there. All parties got what they wanted and needed and it was a smooth, amicable and respectful process. The parties can now get on ‘working in the business’ knowing that their arrangements are locked away and well-documented for future reference, as required. Total costs were, if I recall correctly, around $10,000.00 – barely 1% of the previous case study! I really cannot over-emphasise the stark difference in the outcomes between these two brief case study examples.
2. Purpose and Value of Business Succession Process
2.1 In very simple terms, business succession planning is the organised and structured process of planning, with appropriate advisers, for the transition of business equity ownership, whether driven by known or intentional outcomes or whether in preparation for a range of contingent circumstances that may or may not occur. I am sure that it could be defined more succinctly, but I am satisfied that this explanation captures what we are talking about here.
2.2 With that understanding, I hope that the introductory case studies sufficiently set the scene for the purpose and value of effective business succession planning. Clearly, the purpose of business succession planning is to document and facilitate an effective, efficient and smooth transition of equity ownership of the subject business from one ownership group to another. Whether it is entirely within a family, or to employees, or whether it is a ‘just in case’ measure for owners of an existing business as between themselves, or whether it is some other arrangement entirely, there is no doubt that a clear and certain plan greatly assists the parties to achieve a successful outcome.
2.3 More specifically, the purpose of an effective business succession agreement – the document that eventually is born from the business succession planning process – is to:
(a) capture all of the relevant parties and other stakeholders, so that there can be no subsequent disputes between them about what is supposed to happen;
(b) identify the trigger events that the parties wish to manage in the agreement;
(c) set out the transactions that will occur if/when a trigger event occurs;
(d) manage the rights and obligations that arise for the parties from the constituent documents of the business entities – principally various rights of pre-emption in respect of shares, units and partnership interest;
(e) document the relevant payment mechanisms and general terms by which the relevant transactions will occur; and
(f) of course, to deal with a range of other relevant administrative-type issues that stitch the whole thing together.
2.4 Further, once you move past these legal purposes, there are some very practical purposes why business succession planning is necessary and beneficial. These include, amongst others:
(a) separating the exiting party from the business in all of the essential legal ways, for example the retirement from various control functions of the business – i.e. as directors and trustees of entities;
(b) releasing the exiting party from existing financial and guarantor functions, for example from bank and other finance facilities, leases and similar liabilities and obligations;
(c) ensuring the continuing parties are not unintentionally burdened by estate administration and other legal consequences of the various trigger events, for example to ensure that the continuing owners do not inadvertently end up in business with the surviving spouse of a deceased principal;
(d) realising the exiting party’s valuable equity from the business, for example through insurance funding or other means to ensure that the exiting party, or the estate of the exiting party, receives fair value (consideration) for the relinquishing of that interest, and to make sure that the continuing parties are not subject to any unexpected financial surprises; and
(e) allowing all affected stakeholders to benefit from a clean break, once a trigger event occurs.
2.5 Considering all of the legal and practical purposes above, in my mind, the value proposition for business succession planning is very simple. I have already stated that business owners –clients – ignore it at their peril, as evidenced by the first case study I shared. Although it comes at some cost, including dollars, time and, yes, a bit of stress, for the clients, the dividends are enormous. Consider the internal family business succession scenario – in the first case study, the failure and unwillingness of the parents to participate in the business succession process has cost them, literally, millions in assets, and substantially in legal costs also. Noting that this matter still continues, the time commitment has already exceeded 10 years. Further, I cannot begin to imagine the stress that has arisen as the various legal proceedings have ensued over that time
2.6 Even if a successful business succession process takes 12+ months and $10,000.00 in costs, it is worth every cent to deliver the legal certainty, peace of mind and effective outcomes –legal, financial and otherwise, which the clients set out to achieve. That is the real value of the business succession planning process. Our responsibility is to fully understand the purpose and value propositions and be able to articulate (sell) that to the clients
3. Common Obstacles to Engaging in the Business Succession Planning Process
3.1 I observed in the first case study that perhaps the reasons why the parents did not or would not commit to the business succession planning process was because of pride, arrogance, ignorance or ambivalence. In reality, there are a host of reasons why parties do not properly commit to the business succession planning process. What I have experienced over the years, however, is that all of these so-called ‘reasons’ can usually be overcome when the parties properly understand and accept the purpose and value propositions discussed above. As also noted, that falls to us, as the advisers, to be able to ‘sell’ that message effectively.
3.2 Accordingly, it is beneficial to briefly analyse the main reasons, or obstacles, which parties encounter, which prevent them from engaging in the business succession planning process. I note the following items are not presented in any particular order of priority, severity, or even frequency of occurring – I have seen them all, as much as each other, over the years, as I am sure many other practitioners have also. The common reasons, or obstacles, that are encountered include:
(a) Generational pride: this was a key element in the first case study, but it is manifest in other ways also. Sometimes the older generation simply will not or cannot hand over the reins, so to speak. They are often too emotionally or sentimentally attached to the business to consider parting ways with it. This is particularly prevalent in farming families. A very common issue is that the older generation is not willing to embrace new ideas, new technology and new ways of doing things. This leads to friction and conflict between the generations that can derail the process. Another manifestation is that the older generation often are of the view that after 40 or 50 years in the business no-one, including their own children, can do it was well as they can and they fear that handing over the reins will lead to business stagnation and failure. Almost without exception this proves not to be the case, although I say ‘almost’ purposefully, because I have seen one case where it proved to be true;
(b) Time poor: regrettably this is a very common issue. It takes us back to the opening premise of this paper, namely that people often report that they are too busy working in the business to work on the business. In reality this is evidence of two common symptoms – firstly that the business is not working successfully enough to allow the business owners to step away, even for a relatively short period to attend to the business succession process, and second, that the business owners simply do not care enough about the business succession process. It is well-known that if something is actually important enough to us, we will find the time to make it happen. Business succession planning is no different. There is one way we can help here. I have, over the years, including quite recently, made myself available after hours to clients – the business owners – to facilitate the business succession process. In my experience, this has been genuinely gratefully received by clients and, after all, what is one or two hours of my discretionary time for what will likely be a $710,000.00 fee to my billing columns;
(c) Perceptions about need: this goes to the very heart of a lack of understanding of the purpose and value of the process and outcomes. Having worked in this space for so long, I confess that it is becoming increasingly difficult for me to understand, or accept, this obstacle. You would think that it would be relatively easy for business owners who are willing to invest their money and time in creating a business would see the benefit of business succession planning, but it is often not the case. In my experience, however, usually one or two well-presented war stories of business succession gone wrong, or not undertaken at all, is all that is required to convince clients that the need is real and the outcome is definitely beneficial to them;
(d) No viable plan: this is the opposite scenario – where a business owner knows that a business succession plan would be useful, but they do not have a viable plan to make that happen – for example, no children, no employees or no other options to effect a transition of the business to in due course. This scenario almost invariably leads to either an arm’s length sale of the business, or, the older-style business succession plan – namely, last one to leave turns out the lights…
(e) Cost-benefit analysis: I concede that it is not an easy thing to discuss with a client, especially a commercial law client, that in conducting their legal matter they will not see much change from $10,000.00. This is where we need to change the narrative. It is not about ‘cost’, it is about ‘value’. As soon as the client understands the difference, they are usually easily convinced that the cost-benefit analysis is favourable. Although somewhat cliché, it is not about whether they can afford to do it, it is more about whether they can afford not to do it;
(f) The ostrich approach: this is a difficult one, and perhaps takes us back to start. Many people are either too ignorant, too ambivalent or too obstinate to take action now in their own future interest. Whatever the actual reason is, this is the ostrich ‘head in the sand’ approach. Sometimes when faced with this scenario, you just have to, literally, wear them down, although this is usually not as terrible as it sounds. It is often the case that there is someone on the inner, or family, circle that is committed to the process and you just need to ally yourself to that person to advocate for the business succession process.
3.3 Thus far we have examined a range of common reasons why effective business succession does not occur. All of those matters relate to issues, obstacles and reasons proffered by the client. Here is another obstacle for your consideration – adviser ignorance, ambivalence or inexperience – yes, it is a thing. As commercial lawyers, however, I believe there is a real opportunity for us to guide our business-owner clients into the business succession process, working closely with the client’s other advisers – accounting, financial etc. But, perhaps this does not occur as effectively as it could, because we consider that we do not know enough about working in this field, or we do not care (or we do not care for it) or we simply scare ourselves out of it because of our own lack of experience, perceived or actual. All I can say to that is that, in my view, all of these obstacles can be overcome. CPD training and research can assist. Start small and build your experience and skills. Personally, I have found this to be a richly rewarding area of the law to practice in and for me, the more complex the better!
4. The Process
4.1
So, we now have some understanding of the practical purposes and value of effective business succession planning and common obstacles that impede it. We now need to turn our attention to the basic process that we should follow to achieve it. In general, I follow the process set out below although, as lawyers, we can fully appreciate that there are always exceptions, or variations, to the rule. Nevertheless, the following steps are generally required to execute an effective business succession planning process:
(a) Step 1 – Initial client meeting to discuss relevant issues: clients enter the business succession process from all sorts of backgrounds. Usually some of the stakeholders are ready and committed, but it is also common that some need to be convinced (as outlined above). I usually start the business succession process by simply having a frank and open discussion with the client about what is proposed to be done and why. Whilst it is often a tailored, bespoke discussion, it generally covers off on the value propositions, the risks of not proceeding, the issues that need to be addressed, the objectives and outcomes to be achieved, the process required, the timelines involved and, importantly, the anticipated costs. Often this discussion occurs initially with those stakeholders who are already ‘on board’ with the process. They are the ‘early-movers’, so to speak. Not unexpectedly, they are also the stakeholders who most often stand to benefit from having a good business succession plan in place. Regardless of that fact, it usually leads conveniently to Step 2;
(b) Step 2 – Family (or owner) meeting: Once the interested stakeholder parties are fully committed, I have observed that they are the ones who are best placed to convince the ‘slow-movers’ to get on board. That usually leads to a ‘family’ meeting or similar (depending on the context of the business successors) which often traverses much of the same material covered in the initial client meeting. In my experience, by the time you get to this second meeting there are already lots of questions that arise. In my view, this is a very healthy part of the process, because it shows that the clients are engaged and seeking a proper and effective outcome. However, it almost always leads to a lot of homework to be done by the parties, and discussions to be had. In the interest of full disclosure, sometimes this meeting can be raw, difficult and even emotional at times – especially in the family scenario. You definitely should be prepared for that! These types of discussions can raise issues that have not been previously considered, let alone discussed and sometimes a few of the family home-truths and grievances need to be aired to progress. Although we are not counsellors (and we should direct clients to seek professional help where required) this is still a healthy process for the participants to go through. The business succession plan will only be successful and enduring if all of those issues are properly agitated and resolved. It has been said ‘a man convinced against his will is of the same opinion still’. 1 This applies to what we are doing here. Although it can take considerable work and effort to assist the clients to get through it, it is worth it;
(c) Step 3 – Proper instructions: once the parties have waded through all of that, you are in a position to obtain proper instructions. Once the issues have been resolved and the agreed outcomes properly identified, the process of taking proper instructions is usually a fairly straightforward process. This involves understanding clearly where the client is starting from and where they want to get to. It is the process of recording the who, what, when, where, why, how, and how much of it all. Often (but not always) a business succession plan is a staged affair, with various KPI milestones or timeframes used as the marker-posts of the staged transition of ownership. Taking the instructions often also leads to the giving of various additional advices about entity structuring and risk management, especially for the successor parties. This is also a great opportunity to engage with the client’s other advisers to provide effective advice to the parties. Remember that individual stakeholder parties should always be invited and encouraged to obtain independent legal advice about their own positions and interests throughout the business succession process, with regular reminders along the way;
(d) Step 4 – Engaging with other advisers: although I have identified engaging with other advisers as a separate step, in reality, an effective business succession planning process should be a joint, collaborative effort with the client’s other professional advisers, particularly with the client’s accountant. I perhaps have not given it sufficient attention yet – often it is the client’s accountant that initiates this process and helps to get the client over the line, as it were. In any event, once you have proper instructions it is opportune, even essential, to undertake your own due diligence on the instructions you have received, both with the accountant and other advisers and on the public records. For example, it could involve confirming the ownership structures with the accountant, undertaking LIST and ASIC searches of property and entity holdings, verifying security interests of mortgagees and other security holders (PPSR), reviewing trust deeds for powers etc., testing the client on specific issues, and a myriad of other due diligence activities, confirming particulars with accountants/insurance brokers/valuers. Once you have a proper picture of the client and the lay of the land, it is always worth confirming the proposed plans with the client’s other advisers, especially the client’s accountant;
One matter requires special attention at this point: it is prudent that all of the advisers should turn their minds at this stage to the potential tax outcomes arising from the proposed plan. Whilst you do not have to be a tax expert to work in this space, some working knowledge of the tax consequences of business succession planning definitely does help. This includes CGT, GST and Duty implications arising from the various transactions that propose to be undertaken. Obviously these outcomes vary greatly depending on the nature of the business, the current ownership structures and the intended outcomes. I do not propose to traverse these issues in any great depth in this paper. Suffice to say that it is the advisers’ collective job – the lawyers and the accountants – to achieve legitimate and viable tax outcome for the clients as part of the overall process. Although business decisions should not be taken with the tax outcomes as the primary motivation
(apropos Part IVA issues) it is often the case that the tax outcomes strongly influence the course of action that the parties take;
(e) Step 5 – Drafting: it may have taken months to get to this point, but once you have all the instructions and the clients are fully committed to the plan and the accountants have signed off on it, it is time to get to work – drafting the business succession agreement. It can be called anything you like, but I almost always refer to it as a business succession agreement. For me, this is the most enjoyable and most rewarding part of the process. This is where you, as the lawyer, use your wordsmithing skills to translate the client’s business succession plan into a well-crafted, bespoke written document, providing certainty and clarity for all of the stakeholder parties involved. It is usually a challenging and complex exercise, but as I said, for me it is also the most satisfying. Obviously precedents are useful, but only insofar as you apply the most important rule of drafting documents – the precedent is only ever the starting point – you have to make the precedent fit the instructions, not make the instructions fit the precedent! Like all commercial law drafting, it is, of necessity, a dynamic and evolving process. It will inevitably take multiple drafts and you will need to lead the clients through it all. They will usually have many questions. This is all healthy and an effective part of the process to obtain the best outcome possible, in terms of the business succession agreement document;
(f) Step 6 – Review with clients: I have already alluded to the review process as part of the drafting process. That is important, but once the drafting is completed, there should be a formal review process with all of the client stakeholders. By now, all of the successor parties should have their own entities etc. sorted out – settled and/or incorporated, with ABNs etc. and these should be fully incorporated into the document(s). The formal review step is an opportunity, if it has not already been previously addressed, to demonstrate to the clients how the document captures and reflects all of their instructions – that is, show them how the document achieves the outcomes they seek to obtain. This is part of delivering on the value proposition. When the client can see something tangible – a written document – that contains clear, certain and binding rights and obligations, it goes a great way to confirming and consolidating the reasons why they entered into the process in the first place. If nothing else, this can assist you when it comes time to issue your (final) bill because there is a recognition by the client of the value delivered in the document;
(g) Step 7 – Finalise and sign: obviously once the document is ready to be engrossed, the parties can sign it. This does not need to be a formal affair – as we know, documents can, and often are, signed separately as counterparts – but given the process that the stakeholder parties (and you) have been through to get to the engrossing stage, signing the business succession agreement can often be worthy of some sort of celebration! Often the clients will feel this even more than you will, depending on how the process has unfolded. All I will say about that is let it be what it will be. The client will drive that in any event. Being a non-drinker, I could not possibly comment on what quality of champagne should be ordered to celebrate, once the business succession agreement has been signed off by the parties; and
(h) Step 8 – Put it into action: the final step, of course, is to put it into action. Once the business succession agreement has been signed, then you go to work on putting those transactions into effect, depending on the timeframes required, of course. Sometimes, there are actions that need to be taken immediately, but often it may not be for a number of years before any actual transactional work will be required. I will not address the actual transactional aspects in this paper, as they are ‘after the fact’ of the actual business succession planning process but, yes, an essential part!
4.2 I will close this part of our discussion by observing that even with the best of will and intention, sometimes it still falls apart! I had a matter a couple of years ago – a dairy farming family – where the son was all geared up to take over the business. We went through an efficient and effective business succession planning process – it was a five-stage step up/down transfer over 10 years so that the father could move into retirement. The first stage was a property purchase in the son’s name, in preparation for the future transition of other real property. That happened smoothly and then the next stage was to be two years after that. To this day I do not know why (and neither does the father) but somewhere between acquiring the property in the son’s name and the first equity transfer, the son changed his mind and got out of the dairy industry altogether! The whole business succession plan fell over and the property had to be transferred to the parents, who are now left trying to sell the whole business and property as a going concern. Best laid plans…
5. Horses for Courses – there is no ‘one-size fits all’ approach – always bespoke
5.1 I have referred above to the business succession planning process and the business succession agreement document(s) being bespoke and tailored. Without a doubt, this is a fundamental truism of undertaking business succession planning advice work because no two clients are the same, or have the same needs or require the same outcomes. It follows that different clients will wish to come at this from different angles, and using different approaches. At this point we need to take a small, but important, tangent from our main discussion focus. On the basis that different clients require different outcomes from the business succession process, and will require their advisers to approach it in different ways, it is important to note that the ‘process’ that I am promulgating in this paper is but one way to approach the task. Whilst the process that I have referred to here is the process that I generally pursue, there are always variations in the process and variations in the approach that the clients wish to take. This speaks loudly to the bespoke and tailored nature of working in the business succession planning space.
5.2 So, if there is no ‘one size fits all’ approach, what other approaches are there? I will describe three approaches and provide some commentary about them:
(a) the first approach is what I will describe as a ‘short-form’ approach. This is often captured as merely a clause in an agreement, whether a sale agreement, or other type of agreement that gives rise to an underlying transaction for which business succession planning is required. The main problem with this approach is that a sale agreement is a transactional document, not a relational document. It is like trying fit a square peg into a round hole from a drafting point of view. To be honest, this type of approach is used by clients where, despite your best efforts, the parties remain
generally ignorant or largely ambivalent about the value and benefits of the business succession process, or they make an informed decision not to turn their minds to it now, (usually because they are time-poor). It should come as no surprise that I do not recommend this course of action to any client, although sometimes it has to be accepted as a compromise position, or as an interim measure, to get a larger commercial deal over the line;
(b) the second approach is the “medium-form” approach. This approach is characterised as a clause – and I will say a comprehensive, stand-alone clause – in another document like a stakeholder agreement, or similar agreement (partnership agreement, shareholder agreement, unitholder agreement etc.) which, by its nature, is a document that affects the ongoing relationship between the parties. I have observed that this type of approach is more commonly engaged where the parties are time-poor and wish to return to the important task of business succession planning at a later date. Regrettably, I have also observed that it is often difficult for the parties to actually return to that task, despite their best intentions, as life, the business and other pressing matters crowd the parties’ discretionary time. Whilst this is still not my recommended approach for business succession planning, it can be a sufficient, if not temporary, approach if done properly;
(c) the final approach is, not unexpectedly, the ‘long-form’ approach. This approach features an independent (or interdependent) stand-alone business succession agreement, which governs and controls the parties’ future relationship, including the transactions that will flow, as it affects the business succession plan. This is the approach that is inevitably selected by parties who are engaged, who care about the business succession process and who understand and appreciate the value and risk propositions. Naturally, it is always the preferred and recommended course of action for the parties to maximise the prospects of certainty and clarity about the business succession planning outcomes.
5.4 Another important, but different, driver of the type of approach that is used in the business succession planning process is the actual type of relationship that exists between the parties. The common relationships are:
(a) Family – usually the generational transition of ownership of business and real property interests from parents to children (one generation to the next). Commonly there is little or certainly discounted consideration in this type of transaction, but that is not a universal or mandatory feature of it;
(b) Employees – the transfer of ownership of business and real property interests from existing owners to key, loyal or deserving employees, or combinations of them. Commonly there is some, but moderate, discounted consideration on account of merit or reward or incentive to those employees, but again, this is not a universal or mandatory feature. Also, it is a common feature that these transactions are staged over time, often described as ‘step-down’, or ‘step-up’ transactions where percentages of ownership pass from one equity owner to the other over time; and
5.5
(c) Unrelated Owners – I have included this type of relationship in the business succession plan because it is common, even though, arguably, this could just be characterised as an unrelated, arm’s length, sale of business (and real property) transaction. Nevertheless, it occurs frequently that unrelated business co-owners wish to make proper and effective plans to manage what will happen between them in certain situations (trigger events) and therefore can be properly described in the business succession basket, certainly for the outgoing party.
To give some sort of context to all of this, consider the following matrix of application of the short-form, medium-form and long-form business succession approach to the different types of relationships that exist. Of course, this is a general observation and is not a hard and fast rule in any scenario.
Another small digression here to address an important issue. In this paper I have largely referred to business succession planning and occasionally mentioned ‘business succession agreement’. For the avoidance of doubt, in the industry, especially amongst accountants, financial advisers, bankers etc, what I have described as the business succession agreement is often called, or referred to, as a “buy-sell agreement”. I regularly tell my Legal Practice Course students that they need to learn, and use, the industry lingo in areas of law in which they are working. I whole-heartedly endorse that position here. So, often when talking to other advisers etc. I will refer to the ‘buy-sell’ agreement, but internally, and certainly the name of the document that I produce for the client, is a ‘business succession agreement’.
Whilst it is fair to use these terms interchangeably there is, however, a further important observation to be made. Often, from the accountant’s or financial adviser’s point of view, business succession planning will only address the common insurable trigger events. Conversely, comprehensive business succession planning can, and should, include a broader range of trigger events, including ones that are not insurable events. It follows that I prefer the reference to business succession agreement because, inevitably, my document will include a broader range of trigger events, not just the usual insurable events. I discuss the trigger events (insurable and non-insurable) further below.
6. The Parties
6.1 We now turn our attention to the particulars – the key issues that need to be covered off in the business succession agreement. First and foremost, it is critically important to identify and correctly capture and record the parties that are affected – burdened and benefitted – by the business succession agreement. I start with two observations about this very important issue. Firstly, it is likely that the ‘parties’ who should be included in the agreement are wider, or broader, or more inclusive, than you would think. Second, it is not uncommon that the individuals (natural persons) who are giving you the instructions may not necessarily have at their instant recall, all of the party particulars that are needed. At this point, you simply revert to your due diligence and/or your ongoing communication with the parties’ accounting and other advisers, who are more likely to be have this information readily at hand.
6.2 The second observation is common sense really It is almost always the case that the individuals (natural persons) who are actually giving you the instructions are only one subset of the ‘parties’ that need to be included in the agreement. This issue also turns on the nature of the business and how it is structured – legally and practically – so it is important to have a good understanding of that also. In the first instance, I would turn my mind to the following classes of parties, as a minimum:
(a) Principals: these are the natural person parties who actually run the business – the actual decision makers. You need to include all of these individuals, as natural persons, as parties to the agreement;
(b) Partners: if the ownership structure is a partnership, then you need to capture all of the partners. We often think of partnerships as being a collection of natural persons, possibly because that is almost always the case with legal practices, however, do not overlook that a partnership can be made up of any number and any variety of different legal entities – individuals, trusts, companies etc. A further variation of this to consider, especially if the business is a professional practice of some description, is that there may be a “partnership” at the head of the ownership structure, but it will commonly have other supporting entities involved (service trusts etc.);
(c) Entity owners: where companies and unit trusts are involved, either as trading entities or as service entities to a primary entity, the owners of these entities need to be captured as well. It is often that case, but by no means mandatory, that these are owned by related parties of the principals, often being family discretionary trusts, with natural person or corporate trustees. These all need to be included;
(d) Other stakeholders: routinely, I also prefer to include all of the principals’ life partners (spouses, de factos, doona companions etc. as opposed to business partners) as parties to the business succession agreement. You may have all of the principals on board with the plan, but unless you include these persons also, the clients may still have a battle on their hands with the surviving spouse/partner or the executors of a deceased estate over the details of the succession plan. Far better to have them ‘stitched up’ in the agreement also, to prevent disputes arising later; and
(e) Affected entities: naturally, you need to also include all of the individual entities that are part of the corporate structure. This includes primary trading entities (of all descriptions), ancillary entities (service trusts, property trusts etc) and any wholly owned subsidiaries of any of those parties. You do not need to include other related entities of individual parties that are not connected, as it were, to the primary trading entity(ies). For example, it is probably not necessary to include any of the principals’ individual SMSF entities, if they are not actually unitholders or shareholders of related entities, for example a property trust.
6.3 In my view, all of the unique parties should be included separately and cumulatively. This is obvious and logical in respect of parties that are, but for their connection to the same business, unrelated. To clarify, what I actually mean by this proposition is that an individual party may need to be included multiple times in the business succession agreement in different capacities. An example will best illustrate the point I am trying to make, as follows:
Consider a medical practice business where there is a partnership of natural person doctors as the main trading entity, with a service trust and a related property-owning entity. We know that we have a number of doctors in the partnership, but let’s just examine one of the them (no pun intended here). Consider Dr Colin O Scopy (pun fully intended here) and his personal entity structuring. Dr Scopy is, personally, a partner of the trading partnership in his own capacity as a natural person. Dr Scopy is also, together with his wife, Tel (incidentally, she is an astro-physicist) the natural person trustees of their family trust, which owns units in the service trust (a unit trust entity) and Tel owns the shares in the corporate trustee. They also have a self-managed superannuation fund, of which they, and their twin sons, Arthur and Endo (both currently studying medicine) are members and of which the four of them are, jointly, the natural person trustees. This is not an uncommon sort of arrangement in a professional practice structure (although the sons as members of the SMSF is perhaps not so common)
In my view, it is best practice to include each party separately – i.e. the same person might appear as a party in the agreement multiples times, but in different capacities. So, in our example the parties would appear as follows:
(a) Principal
Colin O Scopy (“Colin”)
(b) Partnership (if any of the partners are not natural persons):
Colin O Scopy (“Scopy”) [and notice that Colin is defined differently here]
(c) Service Trust Entity Owners:
Colin O Scopy as trustee for the Scopy Family Trust and Tel E Scopy as trustee for the Scopy Family Trust (together “the Scopy Family Trust”)
(d) Property Trust Entity Owners
Colin O Scopy as trustee for the Scopy Family Super Fund
And Tel E Scopy as trustee for the Scopy Family Super Fund
And Arthur O Scopy as trustee for the Scopy Family Super Fund And Endo Scopy as trustee for the Scopy Family Super Fund (together “the Scopy Super Fund”)
(e) Stakeholders
Tel E Scopy (“Tel”)
And Arthur O Scopy (“Arthur”)
And Endo Scopy (“Endo”)
Notice that Dr Scopy actually is listed four separate times in this document. Tel is listed three times, and the boys get two mentions each. Note also that I have used middle initials of the parties just to be pithy, but I recommend using full names in all instances, so Colin Oscar Scopy, Tel Evian Scopy, Arthur Oscar Scopy etc. (Endo doesn’t have a middle name) In this example, I would definitely include Tel as a stakeholder, but I would likely be content to leave out the children, Arthur and Endo, but it very much depends on the circumstances.
Remember also that Dr Scopy is just one of the partners of this medical practice partnership. If you can imagine that there could reasonably be four or five, or more, partners of the medical practice, each with related spouses, family trusts and super funds etc., you can easily see there will likely be many parties that become bound by the business succession agreement. It is not at all uncommon that the execution jurats for all of these parties can run for pages. On that point, I also like to group them in their individual descriptions –principals first; partners of the partnership next; then the related service trust entity owners; then related property trust entity owners; then stakeholders etc., each starting on a new page, if possible or practical.
I adopt the individual party inclusion model in all my business succession agreements and, in fact, in all of my commercial drafting. I contrast this approach, however, with what I will describe as a single inclusion method, where each party is only referred to once regardless of the number of separate capacities in which those parties are connected to the business. I have seen this approach taken by many commercial lawyers. I concede that this approach may be more efficient but, in my view, this efficiency comes at the cost of certainty and clarity, which are, in my mind, the more important drivers of commercial documents. On that basis, I prefer and recommend my approach of including all parties individually, even if someone is appearing multiple times in different capacities and ends up having to sign the agreement three or four times.
6.4 Finally on the issue of the parties, it goes without say that all parties should be fully and properly identified, with entity identifiers like ACNs or ABNs used and residential or registered addresses listed. Each party should also be individually defined in shortform (per my example above) for easy reference throughout the agreement. Parties in the same class (principals, partners etc.) should also be defined collectively.
7. Trigger Events
7.1 Once you have all of the parties sorted out, you must turn your mind to the type of business succession agreement you are drafting. On this issue, I consider that there are really two types of agreements that are relevant, namely:
(a) certain: in the sense that there is already an agreed transition event that is going to occur between the parties and the purpose of the agreement is to document that known transaction. This type of business succession agreement may, but does not need to, have triggers (akin to conditions precedent) in play, although it likely may have been precipitated by one occurring. It is more common in the family or employee succession scenario; or
(b) contingent: in the sense that the agreement is between existing owners of a business and is designed to cover a transaction or transactions that will occur if a given thing happens. This is the more common scenario of purely business succession planning and it is this type of business succession agreement which is usually driven by a range of trigger events (effectively conditions precedent) that must occur before the transactions will take effect. The notion of making the plan is so that there is certainty for the parties if one of those trigger events occurs.
7.2 I will only deal with the first type of business succession agreement – the certain type –briefly. As noted, it is most prevalent where there is a family business transition occurring or otherwise a transition to one or more employees. In these scenarios the parties have commonly already agreed to a transaction that will occur and our job, as the lawyer, is to simply draft an agreement that captures those agreed transaction(s) In many respects, this is an “ordinary” sale of business type transaction, although it will likely have some special features that would not appear in a purely arms-length sale of business agreement. The nature of it, however, still qualifies it as business succession and no doubt there has been significant planning involved in the process
7.3 The other type – the contingent type – is the more specialist business succession agreement and is the type I wish to focus on more substantively here. It is more common and more effectively used for existing business owners who wish to have a clear and certain plan in place as a ‘just in case’ measure, to manage all of the risks discussed earlier, should something happen to any of those business owners. The lynchpin of a business succession agreement is the occurrence of a trigger event, in the form of a condition precedent to any of the transactions set out in the agreement happening. When drafting a comprehensive business succession agreement, I prefer to divide the range of possible trigger events into three different categories, as follows:
(a) Category 1 – Insurable events: these are the more traditional buy/sell agreement trigger events that accountants and financial advisers are used to seeing in a business succession agreement, as alluded to earlier. They are events for which a natural person can hold insurance so that upon the occurrence of an event, an insurance payout is obtained by or on behalf of the insured principal, as the primary method of funding the exit of that principal from the business.
The usual insurable events that are covered are:
(i) death;
(ii) trauma; and
(iii) tpd (total and permanent disability)
I note that it is beyond the scope of this paper to examine what constitutes trauma and tpd for insurance purposes. That is wholly a matter for the insurance advisers. I consider that the ‘death’ trigger is sufficiently self-explanatory;
(b) Category 2 – Retirement: this category is reasonably intuitive, capturing:
(i) planned retirement (due to age or some other factor); and
(ii) unplanned retirement
Unfortunately, I am not aware of any insurance provider who is currently offering insurance against either of these events. Certainly, a planned retirement can be well-known and well-planned for in advance and the funding of a planned retirement can be budgeted or otherwise financed relatively smoothly. Unplanned retirement, which is for all intents and purpose, a euphemism to describe the situation where a majority of the business owners take the decision to oust another of the business owners for any number of reasons – usually linked to an incompatible personality type or just plain-old poor performance – is less predictable and therefore the funding of it can be more difficult to manage. It may also come at an inconvenient time for the business or the remaining business owners; and
(c) Category 3 – Non-insurable events: this category is a broader, catch-all (potentially) provision, and can be tailored to suit the client’s perceived areas of risk. Again, unfortunately, the matters covered by this category are not insurable events to the best of my knowledge. That makes planning for them occurring, and funding an exit when they do occur, potentially difficult and burdensome on the continuing parties. Nevertheless, it remains the case that it is better to have these included in the business succession agreement, with a clear and certain plan to deal with them if and when they arise, than to leave it all to chance and ‘good faith’ negotiations. The specific types of issues captured in this category include:
(v) other impairment (e.g. deregistration from a mandatory professional body)
I accept that there could also be others included in this category, but these are the ones that I generally use, subject to the client’s instructions.
As a side note, I offer a cautionary tale against underrating the value of including these triggers. Years ago, I was involved in a property development syndicate in Hobart which had a business succession agreement that included a matrimonial breakdown trigger. It turned out that it was me that suffered that trigger event. Consequently, I was able to use that trigger event to exit what was otherwise an onerous financial situation for me. Admittedly, the inclusion of these triggers are usually for the benefit of the continuing parties, but in this instance, it proved to be a significant advantage to me, as the exiting party.
7.4 Category 1 trigger events are almost universally included in every business succession agreement (and the more mainstream version – buy/sell agreements). Categories 2 and 3 are, obviously, discretionary. The client always needs to make a considered and informed commercial decision about which, if any, of the trigger events to include in the agreement. Some clients will choose to only include the insurable events, and this is often on the advice of their accountants or financial advisers. Other clients will wish to include all possible options and, of course, some clients will take the more considered approach to mix and match as they perceive the need. The reasoning for including the Category 2 triggers is straightforward enough, so I will not elaborate here. Succinctly, the main reasoning for including the Category 3 triggers are:
(a) Matrimonial breakdown: does the client, or the continuing principals of the client, wish to expose the business to a potential (and potentially acrimonious) matrimonial property settlement. Worse still, do the continuing principals want to risk ending up in business, as it were, with the disgruntled ex-spouse! Better to have an exit strategy that enables the business to avoid these risks, even if the sense of loyalty and wish to support their colleague going through the matrimonial is strong;
(b) Bankruptcy: in many instances a personal bankruptcy/insolvency event will force the hand of the continuing principals, in any event. However, even if that does not occur, does the client wish to be in business with a trustee in bankruptcy? Or, potentially worse than that, knowing that a bankruptcy event has occurred, do the continuing principals trust the affected principal sufficiently to risk exposure to the finances of the business?;
(c) Dependency (e.g. drugs, alcohol, gambling issue etc.): this is perhaps the saddest situation of them all, but it definitely does arise. In this case, do the continuing principals trust the affected principal to be able to work in and contribute to the business effectively? Is there a financial risk exposure if the affected principal remains in equity ownership?;
(d) Loss of capacity (legal and/or mental): this one has obvious legal implications. If a principal loses legal capacity (e.g. from early on-set dementia; or has committed a felony and is incarcerated) they do not have the ability to function in and contribute to the business effectively. In those circumstances, it is prudent for the continuing principals to sever ties with the affected principal, regardless of whether the circumstances dictate any amount of compassion or otherwise; and
(e) Other impairment (e.g. deregistration from a mandatory professional body): again, this type of event may force the hand of the continuing principals. It may be industry driven. For example, if a pharmacist loses registration for any reason, they are not permitted under Tasmanian legislation to hold an equity interest in a pharmacy Similar legal positions apply to doctors, lawyers etc. If a partner of a legal practice is struck off from the role of practitioners, they can hardly continue as a partner of a legal practice firm, can they? And, even if they could, would the continuing partners want them to?
7.5 It is the existence of the trigger events, as conditions precedent, that gives the business succession agreement its efficacy and power. Having committed to a pre-agreed course of action when any one of the agreed trigger events occurs, each principal/partner/ownership group of the client entity knows exactly what will happen if a trigger event happens to them, or to one of the other principals. Of course, most parties enter into the business succession agreement with the very natural view that ‘it won’t happen to me, it will happen to them’ but the reality is that no-one can predict what will occur in the future that may precipitate a trigger event occurring. Having put in place an agreed plan about what will happen, it is this certainty that gives the stability and peace of mind to the parties, making the business succession agreement a useful, even a powerful, tool in the suite of governance documents that the client can rely upon.
8. Rights and Obligations
8.1 We have dealt with the “who” (the parties) and the “when” (the occurrence of a trigger event). Now we turn our attention to the “what” and, I suppose, the “how” of it all. The underlying mechanics of a business succession agreement is the multilateral granting of put and call options by the parties to each other, subject to the occurrence of a trigger event. Critically, this has to be a two-way street, with the granting of reciprocal options, for the business succession agreement to work effectively and for the parties to have sufficient incentive to enter into it. There has to be sufficient upside benefit to the parties under the agreement to motivate them to accept the downside burden that comes with it. Consequently, and this is at the very heart of it all, it is central to the effective operation of the business succession agreement that:
(a) each principal grants to each other principal:
(i) a pro rata right to purchase the interest of an exiting principal in the partnership or other trading entity (call option); and
(ii) a pro rata right to require the continuing principals to purchase that principal’s interest, if that principal exits (put option);
(b) each related entity owner grants to each other owner:
(i) a pro rata right to purchase the interest of an exiting owner in the related service entity (the call option); and
(ii) a pro rata right to require the continuing owners to purchase that owner’s interest, if that owner exits (the put option); and
(c) each property ownership entity owner grants to each other property entity owner:
(i) a pro rata right to purchase the interest of an exiting owner in the property ownership entity (the call option); and
(ii) a pro rata right to require the continuing owners to purchase that owner’s interest, if that owner exits (the put option)
Of course, there may be other entities to be included also, or there may only be a single trading entity that needs to be dealt with. Obviously you adapt these provisions to suit your instructions. The reference to pro rata captures the concept that where there are two or more continuing principals/owner entities, each of those parties obtains rights in proportion to their individual ownership shares, relative to each other, but not relative to, or including, the exiting party. Keep in mind, however, that the notion of pro rata is only a starting point. When a trigger event actually occurs, the individual circumstances of the continuing parties may dictate that a different proportionate acquisition has to occur. In this situation it also helps to remember that even with the benefit of the certainty that flows from a well-drafted, fully-executed business succession plan, whilst the parties are in agreement, any part of the plan can easily be varied or modified to suit the circumstances. The certainty aspect only needs to prevail when a disagreement arises between the parties, and that is, in my view, probably its greatest attribute.
8.2 The granting of the necessary put and call options should be done separately, clearly and unequivocally in each instance, for each defined class of parties in the business succession agreement. In the granting of the put and call options, there are some parallels to the preemptive rights that commonly exist in company constitutions and similar constituent documents, but some notable differences also. The most obvious of these is that the granting of put and call options create, upon exercise, mandatory obligations of the parties to buy or sell those ownership interests. Pre-emptive rights are optional at best and do not necessarily require pro-rata participation. Where the granting of the put and call options aligns with the pre-existing pre-emptive rights, nothing further needs to be done in that respect, however, it is more likely that some drafting will be required to ensure that the agreements made between the parties in the business succession agreement actually supersede the pre-emptive rights, at least to the extent of any inconsistency.
8.3 I now introduce a concept which I call the ‘wait & see period’ To be clear, I do not claim ownership of this concept, but it is not a mandatory inclusion in a business succession agreement, and the inclusion of it in these types of agreements as by far the exception, rather than the rule. In my view, however, the inclusion of a wait & see period provides the maximum possibility for flexibility for the parties, giving them the ability to make informed, non-urgent decisions, and even observations, about what the effect of a trigger event occurring will be on the business. It also facilitates fairness, reasonableness, concession and sometimes even compassion, as appropriate, between the parties that are in business together.
An example will assist here. Consider, and this is not uncommon, that a principal may suffer, say, a heart attack. A heart attack is a defined trauma event and without a wait & see period, a mandatory exit of the affected principal is required under the business succession agreement. Assuming the affected principal are insured, an insurance payout is delivered and off they go. However, this may be critically detrimental to the business if the affected principal is a key person. The business may lose knowledge capital, goodwill and value if a key person exits the business unexpectedly. It may also have a material effect on the business’ relationship with its bankers, creating considerable financial pressure. Similarly, no one ever plans to have a heart attack. The implications of a business succession agreement without a wait & see period may have a detrimental outcome on the affected principal also. They may not be ready or willing to exit, despite the terms of the agreement. Put simply, the mandatory exit of the key person principal may not be the desired outcome of either the affected principal or the remaining principals.
Therefore, a period of time, called the ‘wait & see period’ can be used as a circuit-breaker for all of the parties to assess the real impacts of the trigger event on the affected principal and on the business, allowing a period of time to prevent rash or hasty decisions being taken. The potential outcomes of incorporating a wait & see period include:
(a) allowing both parties to return to ‘business as usual’ if the effects of the trigger event are minimal, or the parties agree to waive the operation of the business succession agreement on that event occurring (and to be clear, if all of the parties are in agreement, there is no impediment to the rights and obligations of the agreement being waived by the parties);
(b) allowing the affected principal sufficient time to assess the effect of the trigger event on them personally without the pressure of time, or without having that decision taken away from them, and to make a decision to exercise the put option rights in a time frame that suits the affected principal; and
(c) allowing the continuing principals sufficient time to assess the effect of the trigger event on the affected principal, and the implications of the loss of the affected principal on the business, without the pressure of time, and to make a decision to exercise the call option rights in a time frame that suits the continuing principals.
8.4 Subject to those proceeding comments, once a trigger event occurs, the put and call options set out in the business succession agreement generally operate in the normal way that options operate. Notices are given and then pre-determined transactions then occur. Interests a transferred and the exiting party(ies) exit the business.
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9. Valuation Methodologies
9.1 Once the parties have certainty about what is happening, almost universally the next most important issue to them is ‘how much’ it is going to cost them. The only commentary and recommendation that is required in this space is to understand that unless you have skills and/or qualifications to advise on business valuation issues, we, as lawyers, should not be providing any advice on this issue. Rather, this is yet another reason to integrate the client’s accountant and, potentially, the financial adviser also, into the business succession planning process. The accountant, in particular, should be much better placed to provide assistance and advice in the business valuation methodology.
9.2 What is important for us to know, as the lawyers who will have to draft the business succession agreement, is that different business use different business valuation methodologies. More accurately, different industries use different valuation methodologies. For example, farm businesses, retail businesses, manufacturing businesses and professional services businesses are all valued using different valuation methodologies. Sometimes, specialist valuations should be obtained, particularly if this is the first iteration of the business succession agreement planning process that the client has been through.
9.3 The more commonly used business valuation methods include:
(a) multiples of future maintainable earnings (comparables) method;
(b) discounted cash-flow method; and
(c) net asset position method.
There are other valuation methods including the entry cost method and the liquidation method that could be applied, but these are far less common. I do not propose to provide any detailed explanation of the various business valuation methods here. This is information that the accountant can and should supply to the process. Suffice to say, if you do not know what EBITDA means, then you should not be trying to advise your client about the value, or even the methodology they should employ. If you do know what it means, then at least you will hopefully be in a position to have a functional discussion with the client’s accountant about the valuation methodology selected by the accountant and how to incorporate that into the agreement.
9.4 In reality, it is virtually impossible for the parties to know how much they will receive (or will have to pay out) if a trigger event occurs because the value of the business at the time of that event will almost certainly be different (whether higher or lower) to the value of the business at the time the business succession agreement was entered into. Therefore, what is more important from the lawyer’s point of view, is that the business valuation methodology is clearly agreed by the parties and that the methodology is properly and comprehensively captured in the agreement, whether as a formula, or be reference to a base-line valuation report, or by some other method. To clarify, it is not really the precise number that matters but it is the means of the calculating that number, which is important to be captured in the business succession agreement. For this purpose, it is practical to include a base-line valuation, or a formula, annexed to the agreement or included in a schedule.
9.5 Another important factor for the client to consider in the valuation discussion is whether a discount rate should be applied to different circumstances. For example, insurable trigger events and voluntary retirement might attract a full valuation rate, i.e. no discount rate. Conversely, the parties may consider that if the relevant trigger event is a non-voluntary retirement or otherwise a non-insurable event then, depending on the circumstances, a discount rate should be applied in consideration of the risk and inconvenience caused to the business by the unplanned and untimely departure. For example, if the trigger event is a:
(a) matrimonial break down, that event may attract a discount of 10%, purely for the inconvenience of triggering an exit event, albeit it may not be anyone’s fault;
(b) dependency issue, that event might attract a discount of 25% (or higher) because, apart from the inconvenience, it is something that the exiting party might have prevented – for themselves and their co-owner parties – had they made choices that were more consistent with being a responsible business owner (I do not offer any other commentary or judgment about that issue, or the morals or ethics of enforcing a discount in these circumstances); or
(c) non-voluntary retirement because the outgoing principal was rorting the books and had to be ‘shown the door’ (commonly referred to in this context as a ‘bad-leaver’) that event might attract a discount as much as 33%, or higher, depending on what the parties agree when the agreement is prepared.
As an interesting aside, for those who are astute enough to consider it, the parties could potentially use the discount factor as an incentive, or disincentive, as the case may be, to moderate the collective behaviour of the parties towards each other and the business
10. Funding Issues
10.1 All of the preceding material addressed in this paper is critical material for the lawyer to be across, as the substance of the business succession agreement. Once the parties have agreed to a valuation methodology and formula for calculating the price/consideration that will be paid to the exiting party, the big issue that the parties need to deal with is how the agreed price will be paid by the continuing parties to the exiting party. As to how, there are probably four or five options that could be employed:
(a) insurance funding (but this is only useable for insurable events);
(b) vendor finance (where the exiting party takes instalment payments over time);
(c) bank finance (where the continuing parties are in a position to borrow from a thirdparty lender);
(d) business finance (meaning that the payment is funded by existing resources of the business, principally future cashflows – which can at least be planned for); or
(e) individual finance (meaning that each of the continuing parties, individually, come up with their own proportionate share of the funds required to pay out the exiting party).
A comment is required here about the funding mechanism – the actual arrangement will likely be impacted by the specific transaction that is intended to occur. For example, if the buy/sell transaction that follows as a consequence of an insurable trigger event occurring is a share sale transaction, then likely the individual parties will not need to fund it personally, because of the availability of the insurance payout. However, if there is no insurance payout, then the continuing parties will need to fund their individual purchase of a proportionate interest in those shares. Alternatively, if the buy/sell transaction is a result of a noninsurable bad-leaver event, then likely the partnership, in this case, would fund the exit payment as a single payment. Alternatively, a unit transfer transaction might be funded by a unit buy-back arrangement by the business entity rather by the individual continuing unitholders. Of course, it is a matter that will be determined by the facts and circumstances that underly the transaction. We recently advised on a matter where initially the clients wished to execute a unit transfer between themselves, but upon further investigation by the accountants, it was agreed that a unit redemption by the entity itself was a far more taxeffective outcome for the parties. Accordingly, the business succession transaction was completely redrafted!
10.2 Insurance funding is a common feature of the traditional buy/sell agreement arrangements that deal only with the insurable trigger events (death, trauma, tpd). Commonly, each individual principal of the business obtains a personal insurance policy covering death, trauma and tpd events at a previously agreed coverage level. Some general issues to consider in respect of the insurance funding include:
(a) first and foremost, just as we should leave the valuation issues to the accountants, we must, as lawyers, leave the insurance advice to licensed financial advisers. That said, we should advise the client, and each of the individual parties, to take that advice in a timely manner so that the business succession plan does not stall at this important stage;
(b) each individual party comprising the client can obtain their own individual policy from their individual insurers. However, it is more logical, and in my view more practical, and potentially more equitable, to have each individual parties have identical, but separate, policies from the same insurer;
(c) it is important, from a tax point of view, that each individual party owns their own insurance policy – i.e. that the owner of the policy is not either the other parties collectively or some other corporate entity in the business structure. This may seem like an innocuous issue but, in fact, it has some significant ramifications. The industry best practice is for insurance policies to be owned by the individuals who are insured and for those individuals to pay the premiums on those policies. This form of ownership also facilitates portability of policies without the impracticality and inconvenience of changing policies if the owner party leaves the business voluntarily, not to mention the risk (although with the obvious downside risk of the policies potentially becoming inconsistent as the parties change over time);
(d) it is more important, however, that regardless of ownership arrangements, that the individual parties pay for their own policies, rather than the business, as an entity, pay for those policies. There are important tax consequences that arise depending on ownership and payment of the policy premiums. Whether the parties then make arrangements for reimbursement etc is a commercial decision for the parties. I will make some further general comments about the tax issues arising from business succession planning below;
(e) it is important for the lawyer who is drafting the business succession agreement to clearly understand who the nominated beneficiaries are of each party’s individual insurance policy. This can have significant ramifications for how the business succession agreement should be drafted. I have addressed this issue further below at paragraph 10.4.
10.3 One key issue for the parties to consider is the quantum of insurance that is required. This question is best addressed by joint-advice from the lawyer, accountant and insurance advisers working in concert. From the:
(a) legal point of view: the best outcome for all of the parties is to facilitate a clean break for the exiting party, leaving the continuing parties with clear air to continue the business. As well as the actual equity payout amount, this also means releases from all legal and financial obligations, including lease, finance and other guarantees and commitments. On that basis, the parties should consider what amount is going to be required to pay out all of those business obligations to which the exiting party is tethered at the time the trigger event occurs;
(b) accounting point of view: in addition to all of the above there are often balance sheet items that need to be brought to account when determining the number that will be required to pay out the exiting party. This usually includes various debit and credit loan accounts sitting on the books of the business entity and unpaid present entitlements in respect of trust entities. If you have ever drilled into the balance sheet of your corporate/commercial clients you will know that it is rarely the case that this is ‘clean’ and there are usually a number of historical financial dags, as it were, that need to be dealt with when a party exits the business;
(c) financial point of view: the parties need to consider the commercial realities of insurance generally, most notably, that the premiums increase at an exponential rate with age and other risk factors coming into play. With his permission and blessing, in the sense that he takes the view that it is important that this issue by addressed, I share a personal experience that Peter Worrall and I dealt with when we were in partnership.
I start with a sample snapshot of our legal practice partnership in 2008. At that time:
(i) I was 35 years old, Peter was 55 years old;
(ii) we had identical insurance policies for identical coverage amounts, covering all of the items addressed above –
the equity component, loan accounts, lease guarantee and equipment finance guarantee, and a bit of cream on top;
(iii) my recollection is that the coverage amount was $600,000.00 (but nothing turns on that for this exercise); and
(iv) we each owned and paid for our own policies, in accordance with the recommended best practice position, but which were then adjusts through the books of the partnership.
Basically, we were doing all of the things that I have recommended in this paper. However, even though we had all of the legal and accounting aspects of our business succession plan in order, there was still the cold stark reality of the financial (commercial) consequences of the plan.
The premium payable on my policy was, I recall, around $2,000.00 per annum but the premium payable by Peter was ten times that amount, in the low $20,000.00s I recall. Project that out to today’s rates with three or four or more insured principals, all 50 years old plus. Even with best plan, and the best intentions, it is not difficult to conceive that the insurance coverage for a comprehensive insurable risk business succession plan could exceed $100,000.00 per annum. That is a significant bite, annually, for any business to bear.
Despite the best will in the world, the parties still have to take a difficult commercial decision to allocate that level of funding to the business succession plan. It makes the decision potentially difficult and raises the issue about whether it would be better to ‘self-insure’ by simply putting those funds aside internally, in case an insurable trigger event, or any other trigger event, occurs.
10.4 I mentioned above about the importance of the lawyer properly understanding who the named beneficiary(ies) is/are of the exiting party’s insurance policy in the event of a payout. The reason for this is that the business success plan needs to guard against the mischief of potential double dipping by the beneficiaries. If not properly and carefully drafted, a business succession plan may inadvertently permit a surviving spouse to receive the insurance payout as a consequence of the insurable trigger event occurring and then still put their hand out for the equity payment to which the exiting party is entitled. It is important that this is properly managed in the business succession agreement using deeming provisions and/or engaging an independent insurance proceeds trustee.
10.5 Very briefly, the deeming provisions mechanism simply relies on the contractual agreement of the parties that if an insurance payment is received, the amount of that payment is deemed to be in lieu of the equity payment that the exiting party would otherwise be entitled to from the continuing parties, or at least that any insurance payment received is offset against that entitlement. Provided that it is correctly drafted, this can provide an effective safeguard against the double-dipping risk.
10.5 Alternatively, a popular model to provide assurance and certainty to the parties – both the exiting party and the continuing party – that insurance proceeds will be properly dealt with is to use an independent insurance proceeds trustee. Under this mechanism, the named beneficiary of the insurance proceeds is the exiting party, or in the case of death, the spouse/partner, but in the business succession agreement, any insurance payment is to be held in trust by the independent insurance proceeds trustee, to be administered strictly in accordance with the terms and provisions of the business succession plan. This has at least a two-fold benefit:
(a) for the exiting party: to ensure that the insurance proceeds are applied to paying out any amount that is properly payable to that exiting party, and not absorbed by the business entity and applied to other purposes, so that there are no funds then available to pay out the existing party; and
(b) for the continuing parties: to ensure that the exiting party does not receive the benefit of the insurance payout without having it properly applied or attributed in satisfaction (whether full or partial) of the exiting party’s entitlements under the business succession agreement, and then still asking for payment from the continuing parties in addition to that insurance payout. To this end, I am aware of at least one matter where a surviving spouse received the insurance payout, and then sought to enforce a payment from the continuing parties in addition to the insurance payout. When the continuing parties refused to pay, the spouse sued and won!
If the independent insurance proceeds trustee model is employed, either the trustee should be made a party to the business succession agreement, or there should be a separate trust agreement should be entered into to control what the trustee will do, and how it will do so.
11. The Business Succession Agreement
11.1 Having provided the advice and guidance through the process, arguably the most important function of the lawyer is to do the drafting that captures the parties’ collective agreement. Admittedly, and of necessity, a lot of planning, work, meetings, consultation, advice, decision-making, review, analysis, and more advice goes into putting an effective business succession plan together. Only once all of that is done, can the lawyers really go to work drafting the business succession plan into a business succession agreement. I do not propose to present any in-depth analysis of what the business succession agreement should look like, apart from noting that it needs to capture all of the elements discussed in this paper. It goes without saying that it should be professionally presented, and operate efficiently, making use of schedules etc. to manage variable and pre-existing material.
11.2 It is trite to say that the primary purpose of all commercial drafting is to provide certainty to the parties. I have said to commercial clients on many occasions that, in fact, you do not need any legal documents at all, whilst everyone is on the same page, but as soon as there is a dispute or a divergence of views, if you do not have a signed written document, then it is too late! That is always the main purpose of all legal drafting – to provide certainty to the parties. Business succession planning is no different, and perhaps in this space, that concept is even more important.
11.3 I have seen a wide range of documents prepared by a wide range of advisers (including offthe-shelf documents that you simply purchase) for business succession purposes, of, in my view, varying degrees of usefulness and complexity. I note that there is not necessarily a strong correlation between those two parameters. Earlier in this paper I addressed whether the ‘business succession agreement’ should be comprised in one or two clauses in a larger agreement, or whether it was a section in a stakeholder agreement, or whether, preferably, whether it was a stand-alone, purpose-built agreement The obvious segue here is to the use of precedents for drafting a business succession agreement. I make a few general observations in this regard – ones that I always share with my legal practice students in the commercial law module, and which are time-tested and well-proven:
(a) first of all, a precedent is only ever the starting point. It is the foundation; the base; the skeleton, or the bones, to which the flesh needs to be added;
(b) you must always make the precedent fit the instructions, not make the instructions fit the precedent. Specific, tailored, bespoke drafting is required on every occasion to deliver a written document that meets the client’s needs;
(c) drafting a good business succession agreement is very much a dynamic process. It requires drafting, redrafting, review and refinement. Then it requires the input of the other advisers who have contributed to the process. Then it requires the client to review and approve or amend, as required. I respectfully suggest that it is virtually impossible to get it completely right on the first iteration, and the lawyer drafting the agreement is ill-advised to think otherwise;
(d) in my experience, delivering the ‘first draft’ to the parties causes a range of other issues to surface, once the parties see the fruits of their labours (and yours) reduced to writing. It can potentially open a veritable Pandora’s box of issues. Two examples illustrate my point:
(i) I once advised an engineering firm on a business succession plan. Engineers are, generally, notoriously particular and when presented with a document (legal or otherwise) will rake over it with a fine-toothed comb, as it were. When they saw the first draft, it triggered a considerable debate between them all about every possible combination and permutation that might arise, and they wanted to agitate each one to the nth degree. It was an epic project to say the least to get them to finally agree on what should be included in the final agreement;
(ii) I am currently advising a firm of general practice doctors. They are stuck on one or two issues where they just cannot, or will not, agree. The issues in this case arise principally around the perceived value that each doctor brings to the table. In particular, the one doctor who is the historical ‘rainmaker’ of the practice, does not agree that all the other doctors should be entitled to a similar payout in the event of an exit. It is a delicate situation that will require some common sense, and some compromise to resolve, but we are not there yet!
12. Finally: A Collection of Other Issues
12.1 Having covered all of the previous material, there are a few loose ends to draw together –random issues that are all important in their own right, but have not earned a stand-alone section in this paper. Please consider the following:
(a) Interaction with other constituent documents: any business entity structure will have pre-existing constituent documents. Companies have constitutions, trusts have trust deeds and partnerships have (or should have) partnership agreements. There may also be stakeholder agreements – partnership, shareholder and unitholder agreements. Often, the transfer of ownership rights are already dealt with under these existing constituent documents, usually in the form of specific pre-emptive rights. However, these are often limited in scope and application, for example they are often not mandatory. It is important that the business succession agreement adequately deals with the interaction of the agreement with those pre-existing constituent documents. In particular, it is important that the parties acknowledge and agree that the business succession agreement supersedes and overrides any of those other pre-existing constituent documents to the extent of any inconsistency;
(b) Stapling of interests: the concept of stapled interests is commonly used in business ownership structures. It simply means that if, for example, you are a partner of a professional practice and there is a related entity that provides services to the trading entity (a service trust) and another related entity that owns the building from which the practice is conducted (a property trust) then if a partner retires from the partnership they are required, at the same time, to sell out their interests in the service trust and the property trust concurrently. It is as if those ownership interests are ‘stapled’ together and you cannot transfer one without transferring the other. The other side of that coin is that if you purchase an interest in the professional practice partnership you are also required to purchase a corresponding interest in the service trust and the property trust. This is a common arrangement in business succession planning, but it is by no means mandatory. It is equally possible to deal with these separate equity interests in separate transactions at separate times;
(c) Tax outcomes: even though it is common (and good) practice to advise that clients should never make a business decisions solely on the taxation consequences of it, there will, in fact, always be various tax consequences of any business succession transaction occurring. If nothing else, the following tax issues must at least be considered by the advisers and the client:
(i) CGT: the exiting party will have a CGT Event A1 (disposal of CGT asset) occurring. Whether that exiting party can access any of the available CGT concessions or not is, of course, a matter for their personal tax adviser to advise them on. The continuing parties should also consider their own CGT consequences. Newly-acquired interests, for example, will have a different cost-base to prior-acquired interests and that may have future ramifications when it comes to their own eventual exit from the business;
(ii) Duty: a transfer of interests may or may not have duty implications under the Duties Act 2001 (Tas) The Duties Act says that entering into a Put and Call Option is a dutiable transaction. This issue is managed by carefully constructing the trigger events as conditions precedent to formation (as opposed to completion). As the legal adviser, you should at least turn you mind to the following matters:
A. Section 225 – if the business succession planning is for a farming family, the first place to start is to try to get the arrangement inside the safeharbour provisions of intergenerational rural transfer exemption;
B. Section 65 – if the business succession plan deals in any way with the transfer of interests in entities that hold real property, then you will need to consider the application of the landholder provisions in respect of the transfer of those interests; and
C. Part 3A (FIDS) – you should also turn your mind to whether FIDS is, or will be, an issue for any of the individual parties or for the whole transaction;
(iii) GST: for other types of entities, it will almost always be the case that a transaction under a business succession agreement is not a taxable supply because the requirements of s9-5 of the GST legislation are not satisfied. Actual ownership of shares, or units, or a partnership interest in an entity that conducts a business is not, of itself, an enterprise for GST purposes and it is unlikely that a person would be registered for GST for that purpose. Therefore, two of the four limbs of s9-5 fail automatically, even if the supply is made for consideration and is connected to the indirect tax zone (Australia). Alternatively, it may be a financial supply (see GSTR 2003/13), depending on the facts.
I have emphasised earlier, and reiterate now, the importance of engaging the client’s regular accountants, or specialist tax advisers, if required, to advise on all of the relevant tax issues;
(e) Releases: one of the key issues for exiting parties is for the business succession plan to deal with the release of the exiting party from all subsisting business obligations –principally as a personal guarantor under leases, bank finance arrangements and equipment finance arrangements etc. This is not always as straightforward as you might hope. It is easy enough to draft the business succession agreement to properly deal with this issue, but when it comes to implementation, a landlord and almost certainly a lender, may have something different to say about it. For example, a classic conundrum arises in the scenario where a single retiring principal is selling to existing employees. If the business premises is leased, the Landlord has to consent to releasing the exiting principal as a guarantor. It may require some financial input, for example and increased security deposit. Likely also, the exiting
principal has secured the business’ overdraft etc. against that principal’s primary residence or other security. A lender will naturally require that security to be substituted to the lender’s satisfaction. It is often the case that the new up and coming employee(s) will not be in a position to provide adequate security. This is a case where the practical outcome is not as always as easy to achieve as the legal. In this scenario, it is likely that a staged transition will be required, rather than a clean break;
(f) Review and Update: it is fundamentally important for the client and the legal adviser to stay on top of the situation. Circumstances change often in business. Equity parties come and go (without a trigger event occurring that activates the business succession plan), assets positions change and the value of the business fluctuates. Any or all of these issues may require the lawyer’s attention, with the client, to review and update the business succession agreement. I suggest there should at least be an annual review, but of course this rarely happens, as parties go back to working ‘in the business’. One obvious issue that arises where a new equity holder comes on board, but not necessarily on the departure of any of the existing equity holders. In this case, the very least that will be required is a deed of accession, by which the incoming equity holder agrees to be bound by the organisation’s existing business succession plan. That said, it would be better that the whole plan is redocumented at that point. The actual departure of an equity holder, whether under the plan or otherwise, should also be used as a catalyst for a review by the parties. Other natural catalysts for review include changes to the relevant law, or the commercial imperatives of rising insurance premiums over time;
(g) Alternative arrangements: like all good commercial documents – partnership agreements, shareholder agreements etc., an effective business succession agreement should be one that the parties are willing to turn to, and apply, when a trigger event occurs. However, it should be mentioned that notwithstanding the existence of a binding business succession agreement, there is nothing stopping the parties from pursing a different course of action if that is preferable to the parties under the relevant circumstances at the time, and if all of the parties agree to it. In this situation, the benefit of the business succession plan is simply to provide certainty to the parties, as a default position, if no other agreement can be reached. In my view, however, it is naturally better to simply action the business succession plan on its terms in the first instance;
(h) Costs: what you charge for advising on business succession planning will obviously be a function of your own skill, experience, reputation and how much the market will bear. It may also depend on how well you have managed to persuade the client of the risks of not acting and/or the value proposition. That said, if I have to give a range, then I would estimate somewhere in the order of $10,000.00 to $20,000.00, especially in light of the two following items below. Obviously, it will also depend on the number of parties involved and the breadth and complexity of the instructions Regardless, as I have advocated earlier in this paper, the actual price you charge should be a discussed with the client on the basis of value, not cost, per se;
(i) Value-adding – additional work required: It is not uncommon that completing an effective business succession planning process with the client can unearth a range of other collateral issues that need to be attended to. You may discover, for example, that a title owned by a related entity is still registered in the name of a prior equity holder as a co-trustee and that no one got around to updating that last time someone left. You might discover that one or more of the individual equity holder trust deeds may need a Bamford review, or is not FIDS compliant, which could affect future real property acquisitions. Depending on the operational structure and processes used by the business, it might be useful to put corporate powers of attorney instruments in place. These items, and a host of others, no doubt, are all opportunities to value add to the process for the client’s benefit; and
(j) Personal Estate Planning: the most important value add, if not a critically important to the whole business succession planning process in its own right, is that you (the lawyer) also turn your mind to the individual estate planning needs of the principals and their spouses/partners. It would be futile, and potentially negligent, to complete the business succession agreement but then leave the personal estate planning of the parties undone. You must make sure that one does not undo the other – that is, that the business succession planning and the personal estate planning are consistent and complimentary of each other and that you do not undo all your good work in the business succession agreement by making inconsistent wills, or failing to draw those wills at all. There is a risk that this could occur if the parties get their own personal wills drawn elsewhere. In my view, it is a necessary sell, but an easy one, to have the principals and their spouses/partners also instruct you to complete their personal estate planning, including personal powers of attorney and enduring guardians, if required.
Conclusion
I have always found business succession planning to be intellectually stimulating and personally satisfying work to do as a commercial lawyer. I accept that others do not share this view. I guess the corollary is that you could not pay me enough money to be a family lawyer or a criminal lawyer! For those of us with a commercial law penchant, however, it is very important work that we do for and with our clients.
The best closing advice I can offer is that you should not take this work on lightly. Apart from strong technical mastery of the subject matter, and a reasonably affable bed-side manner, you also need a considerable amount of patience and determination to stay the course and see it through to the end. Working with the parties that make up a client in this space is also an interesting and eye-opening experience. Often, you need the ability to herd cats, as it were, to get the clients to a final agreement that can be documented. You also must have excellent file management skills and mental acuity to juggle all the balls and then reduce it all into a written document. It is vitally important that you do this well, because there is so much at stake for the client parties.
In this paper I have walked through a range of high-level issues that need to be traversed by the advisers and by the parties to produce an effective business succession plan. I have presented the key elements of one approach – a comprehensive and effective approach and my preferred approach
– to the business succession planning task. I accept that there are other approaches, but I would argue that the key issues are similar, if not identical. I have, hopefully, provided a general overview that is sufficient to help you recognise that your investment in technical training, client management and general drafting experience are essential, if you want to be an effective adviser in this space.
I have not asserted in any way that this paper is comprehensive and covers every aspect of every issue in business succession planning discussion. Nor have I tried to hold myself out as any sort of expert. My commentary is driven by my own experience and observations. It follows that I welcome any constructive feedback from established practitioners in this area of the law, and/or discussion with commercial law practitioners (early career or otherwise) who are interested in working in business succession planning law.
Hopefully, I have also raised awareness of both the opportunity that exists and the importance of the work done in this space. In my observation, less than 10% of all businesses I deal with would even consider the business succession planning issues I have addressed in this paper. Far fewer clients actually proceed to make the investment of getting a good business succession agreement in place –for all the reasons I addressed earlier in the paper. This reality presents an amazing business and career opportunity for the right kind of commercial lawyer in the Tasmanian legal market.
