An often overlooked aspect of owning and running a business is what will happen when you no longer want to be involved.
When you are the sole owner of a business, this can be relatively straight forward, you can generally wind down the business or transfer it to another person, whether that be your family, employees or a third party.
Things get more complicated, however, when two or more people are running a business and one of them ceases to be involved, whether voluntarily (e.g. retirement, resignation), or involuntarily (illness, disability or death). It is at this time that it is vitally important to have a clear succession plan in place to ensure that both the leaving person and the remaining one’s interests are properly protected.
Failure to plan for these events can have some fairly unpleasant consequences. For example, a retired person may retain the rights to dividends, even though they are no longer doing anything to generate profits. As another example, a deceased person’s interest in the business may pass to their next of kin, who will then have rights in relation to running the business, regardless of the intentions of the remaining owners.
In order to mitigate these risks we advise our clients to put into place agreements to cover what will happen in the event of one business owner ceasing their involvement with the business. This may involve any one or more of the following:
- Profit entitlements and/or shareholding being tied to involvement in the running of the business;
- Forced sale of shares if a business partner ceases their involvement in the business;
- Forced sale of shares on death or permanent disability, often funded by insurance.
What is vitally important is that these matters are addressed early in the business lifecycle. Waiting until the relevant event has occurred will be too late to put in place effective and balanced plans to appropriately deal with these exit events.
We recommend all of our clients have a business succession plan in place. If you need help with this crucial area, please contact our Commercial Law Team today on (02) 9411 4466 or email email@avlawyers.com.au.