Ahead of The Game – EPISODE 12: Business Succession (Changing the Game Part 3)
Welcome to Ahead of the Game, a podcast brought to you by KMT Partners. I am Andrew Montesi. We are continuing on with our “Changing the Game” theme with our very own Lachlan Kennett, providing us with some short and sharp tips and insights on business succession.
If you want to hear more about it, simply click on the iTunes, Stitcher or Soundcloud links to listen in!
AM Andrew Montesi
LK Lachlan Kennett
AM Welcome to Ahead of the Game, a podcast brought to you by KMT Partners. I’m Andrew Montesi. In this instalment of our miniseries Changing the Game, KMT Director Lachlan Kennett provides short and sharp tips and insights on business succession. Lachlan, welcome.
LK Thank you.
AM So kicking off this discussion on business succession, at what point can business succession actually occur?
LK There’s a number of triggers that broadly fall into two areas. The first one being everything goes well and someone wants to retire or they decide that they’re resigning and going off and doing something else and that’s, I suppose everything going well, that’s one of the triggers. The second one is due to death or disability. Something happens to the owner or one of the owners and that forces the sale or the handover of the business.
AM So two-part question to follow up. So firstly, do people generally or do business owners have these plans in place from your experience and if they do want to get in this path, what should a plan for, I guess a death and disability issue look like?
LK Typically, most people as with their personal risk don’t tend to consider the risk within the business if something goes haywire. So death and disability can impact a business as much as the personal side of things. With the business, most businesses don’t have a formal structure in place. It may be a handshake agreement but that’s it. The important part of having a succession plan is to make sure that everything is noted and everyone knows what is happening and then there’s funding mechanism behind it.
So if your business partner and you have an agreement, what’s the value of your share? Where’s that share being paid and how is it being funded? That’s the important part. There’s no point of having an agreement in place if your business partner can’t come up with cash to pay your spouse. So having those agreements and having it all set out so that both your business partner and perhaps your spouse you leave behind know what the value of that business should be, can, I suppose solve a lot of heartache in the future.
AM So just a cover of a couple of key considerations for some succession considerations or exit strategies where you do have enough opportunities to have some control. What are key considerations for those looking to move on from a family business?
LK Yes. So ultimately, you need to decide what’s happening with that business going forward. If you’re going to sell it to someone else outside of the family, then that may be often easier. A lot of the issue arises because for most people, the business is their retirement. Now that’s all well and good if you can sell it at retirement for a good price. However, what if you want to hand that over to your child? How can that child fund your retirement or provide you the funds to live in retirement?
Do you have to take that from the business? Do you give that business to the children? What structure does that look like? And it’s, I suppose a two part, how am I going to fund my retirement and what do I need in retirement? And two, what situation does my child need to be left in the business so that it can be successful and it can be a worthwhile venture for them? So that balancing act is very hard and, I suppose you need a lot of collaboration across the family.
AM You’ve touched on it already, but can you maybe just highlight a couple more key tips and considerations when it’s looking as if an external company or group will buy out your business. What should we be thinking about in that scenario because I know a lot of our listeners will be looking at that as potentially a goal?
LK Yes. So there’s a lot of things I suppose to consider, whether you need tax advice in regards to the best way to structure that. But ultimately what we start to look at as well is, would that be appropriate for retirement and I suppose, mitigating the risk of not knowing exactly how much you’re going to receive from that payout.
As I’ve said, most people, their business is their retirement. Now that may be a good thing but in a lot of cases it’s not. Having an alternate source of retirement, funding somewhere else is often a good idea because it means that you’re not reliant on selling on a certain date, you can, I suppose sell on your terms rather than someone else’s.
AM Big one which I imagine would be particularly tricky. How do you actually go about determining the value of your business?
LK Yes. So depending on the business, there’s normally a lot of different considerations. Getting a form of value done is often a good place to start but also considering the risks in the future. Very simple case. If you run a hardware store and two years before retirement a budding [?] opens up next door, you may struggle to sell your business for what you thought it was worth five years ago. So making sure that those risks are mitigated where possible or that you’ve got alternate payments is important.
AM So when should I start planning for this type of scenario?
LK The sooner you have the conversation, the better and the sooner you start to look at, well, how am I going to pass over my business or am I going to sell my business? And a lot of times those plans change as perhaps your children may change what they want to do or what have you. But setting something up as soon as possible or starting to have those discussions as soon as possible is very important.
AM Thanks very much.
LK Thank you.
AM Thanks for listening to this game changer episode with Lachlan Kennett from KMT Partners. Your next step, contact KMT and arrange a time to meet. KMT will wear the cost of this initial discussion. Get in touch and find out more about KMT’s accounting, business, management, growth, compliance and advisory services. Get in touch at kmtpartners.com.au.
This podcast is brought to you by KMT Partners. KMT is a leading accounting and wealth management advisory firm in South Australia, assisting you to emerge, renew, grow and build resilience in business, themes which are central to this podcast series. For more information visit KMTpartners.com.au
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This podcast is hosted and produced by Andrew Montesi from Apiro Consulting apiroconsulting.com