What does business succession planning involve?
Business Succession Planning prepares your business for a change in ownership, leadership or management responsibility. You may transfer shares, sell your interests or appoint successor management while retaining ownership. The process can involve shareholder arrangements, funding, management capability, financial reporting and the legal documents needed to implement your transition.
Choosing an ownership succession arrangement
Your preferred succession arrangement depends on who will take over, whether they can afford to acquire your interest and how much involvement you want to retain.
A family member taking over management without acquiring shares presents different issues from a senior Manager purchasing your company. Your succession arrangements should reflect the transaction you actually intend to complete.
Family succession
Your family member may already work in your Construction Business and understand its operations. That does not necessarily mean they are ready to assume responsibility for tendering, Commercial Management, finance and staff.
You also need to consider whether other family members expect an ownership interest, how shares will be transferred and whether you will remain involved.
If you are concerned about family disagreements over control or future distributions, address those arrangements before transferring ownership. Your existing Shareholders Agreement may need to be reviewed or amended.
Sale to existing shareholders
Your existing shareholders may be the most obvious purchasers, particularly where they already manage substantial parts of your business.
Before agreeing on a price, examine the transfer rights, valuation provisions and restrictions in your Shareholders Agreement.
A shareholder who cannot fund the purchase immediately may propose instalments or deferred payments. Those arrangements can leave you exposed after transferring shares, particularly if payment depends on future profits.
Management Buyout
Your senior Managers may know your customers, Projects and commercial systems but lack the funds to purchase your business outright.
A Management Buyout may involve external finance, staged payments or deferred consideration. The proposed funding could reduce the cash available for procurement, wages and other commitments.
You should also assess whether your Managers can assume responsibility for financial reporting, tender approvals and major commercial decisions. Business Succession Planning needs to address management capability as well as the purchase terms.
External sale
An external purchaser will want evidence that your business can operate after you leave.
If you personally secure most Projects, negotiate major contracts and resolve difficult commercial issues, a purchaser may question whether your earnings can be maintained without you.
You may need to strengthen your management team, improve reporting and resolve outstanding commercial issues before approaching buyers. Those matters also form part of your Business Exit Planning.
Separating ownership from management succession
You can retain ownership while appointing a new Managing Director or transferring responsibilities to an existing Executive.
If every major tender, contract and expenditure decision still comes to you, simply appointing a successor may not reduce your involvement.
Your incoming leader needs clearly defined authority, reliable management information and an understanding of decisions reserved for Directors. Staff also need to know who is responsible for commercial approvals and operational decisions.
Rachelle can review the management and Governance Services arrangements needed for your transition. Shannon can assist with financial reporting and management controls where appropriate.
The financial consequences of succession
Your succession arrangements can create financial pressure even when you and your successor agree on the purchase price.
If your successor intends to fund a staged share purchase from future profits, the payments may reduce working capital and the cash available to deliver existing Projects.
You may also remain liable under personal guarantees or deferred payment arrangements after transferring control.
Shannon can assist with financial modelling and cash flow forecasts. Rachelle can review the commercial terms, continuing obligations and proposed transaction documents, with specialist taxation advice where required.
Preparing a successor to run your business
Your successor may need to take responsibility for tender approvals, customer relationships, procurement commitments and significant commercial decisions.
A staged transition can allow your incoming Manager to assume defined responsibilities while you retain authority over particular matters for an agreed period.
If your Managers rely on your personal knowledge of Construction Contracts or customers, documenting procedures and transferring relationships may be as important as changing formal reporting lines.
Rachelle can help establish the management and governance arrangements needed for the transition. Where your entities or ownership arrangements also need to change, Construction Business Structuring can address that work.
FAQs About Business Succession Planning
Can I appoint a successor without selling my shares?
You can retain ownership while appointing another person to manage your business, subject to your company’s governance arrangements and the authority given to your incoming Manager.
How can my Managers fund a Management Buyout?
Your Managers may seek external finance, negotiate staged payments or agree on other purchase arrangements. You should assess the funding risks before committing.
Does succession planning involve a Shareholders Agreement?
Your proposed transfer may require a new or amended Shareholders Agreement, share sale documents and changes to governance arrangements.
When should I start succession planning?
Start before your intended departure, particularly if your business relies heavily on your relationships, commercial knowledge or approval authority.
Discuss your business succession
Blaze Business & Legal can help you assess your succession options and determine the commercial, legal and management work required.
Contact Blaze Business & Legal or call (07) 3063 3373 to discuss your requirements.
