Planning for business succession is essential to ensure continuity and stability in the event of a key owner’s retirement, death, or incapacity. A well-structured plan helps preserve the economic value of the business, minimise disruptions, and provide certainty to all stakeholders.

Choosing the Right Business Structure

Succession planning options depend heavily on the business structure in place. The main structures include:

1. Sole Proprietorship

This is the simplest and least expensive structure. The sole proprietor has full control and bears all liabilities. However, succession is difficult, as the business typically ends upon the owner’s death.

2. Partnership

Partnerships involve shared ownership and management. They are flexible but can dissolve when a partner exits, unless a clear partnership agreement is in place. This agreement should outline each partner’s rights and responsibilities and include provisions for succession. (See Partnership Act 1895 (WA))

3. Company

Companies offer limited liability and perpetual succession, meaning the business can continue despite changes in ownership. Succession is governed through the company’s constitution and shareholder agreements, which should include provisions for the transfer of shares and continuity of management. (See Corporations Act 2001 (Cth))

4. Trusts

Trusts hold assets on behalf of beneficiaries and can be discretionary, fixed, or hybrid. Succession planning is managed through the trust deed, which should allow for the appointment of a new trustee or transfer of assets. Though not legal entities, trusts require careful documentation to ensure business continuity.

Essential Succession Documents

Regardless of structure, proper documentation is critical. Key documents include:

  • Partnership agreements;
  • Company constitutions;
  • Shareholder agreements;
  • Trust deeds; and
  • Buy-sell agreements.

These documents govern the relationships, rights, and obligations of the business owners and are critical in ensuring that the succession plan is legally enforceable and aligned with the business’s operational needs.  They should address triggering events (e.g., death or retirement), valuation and transfer of ownership interests, and funding arrangements for buyouts.

In addition, it is critical that Wills and Enduring Powers of Attorney are prepared and in place.

Conclusion: Start Early and Seek Legal Advice

Starting the succession planning process early and involving all stakeholders helps ensure a smooth transition and preserves the business’s legacy and value. It is also essential to consult experienced legal professionals to ensure that your succession plan is tailored to your specific circumstances and complies with relevant laws.