For many entrepreneurs, their business is their baby. You have likely spent years, perhaps decades, pouring your energy into building it from the ground up. You know every client, every process, and every challenge.
However, there comes a time when every owner must step aside. Whether due to retirement, illness, or simply a desire to pursue other interests, you will eventually leave your business. The question is: will it be a smooth transition or a crisis?
This is where succession planning for business owners becomes critical – a strategic process designed to capture the value you have created and ensure the business survives without you.
Many owners delay this process because they are too busy with day-to-day operations. But failing to plan can destroy the legacy you have worked so hard to build.
Why Succession Planning for Business Owners Is More Than Just a “Will”
A common misconception is that a Will covers your business interests. While a Will is essential for personal assets, it’s often insufficient for trading entities such as companies or trusts.
A Will only takes effect after you die. A proper succession plan goes further by preparing for your retirement, unexpected incapacity or total and permanent disability (TPD).
Importantly, a Will typically cannot control assets held in family discretionary trusts or non-estate company shares. This is because such assets are owned by separate legal entities, not the individual personally. Without an enduring power of attorney or clear operational strategy, if you were to have a sudden accident today, who would approve payroll or supplier payments tomorrow? A standard Will does not assist with these issues.
Effective succession planning provides continuity. It reassures your staff, clients, and family that the business can keep operating, no matter what happens to you.
Three Main Exit Paths for Business Succession
Before you can plan the “how”, you need to decide on the “who”. Generally, there are three main ways to exit your business.
1. Internal Transfer to Family or Staff
Passing the baton to people already inside the business can preserve its culture.
- Family successionkeeps the legacy within the family but requires careful management of relationships and expectations.
- Management buyoutallows your leadership team to buy the business from you, possibly using vendor finance paid from future profits.
2. External Sale to a Third Party
This can maximise the immediate cash return. Typical buyers include:
- Industry competitors seeking growth.
- Private equity investors seeking structured returns.
- Entrepreneurs wanting an established business.
3. Passive Ownership and Management
If you prefer not to sell completely, you can retain equity and step back from day-to-day control. By appointing a General Manager or CEO, you can receive dividends without handling operations yourself.
5 Essential Steps for Your Succession Plan
1. Business Valuation
Before you can sell or transfer a business, you need an objective valuation. Emotional attachment often inflates perceived worth, so an independent valuation ensures a realistic market assessment.
In New South Wales, since 1 July 2016, transfer duty on key business assets such as goodwill, intellectual property, and statutory licences has been abolished, making a NSW business attractive to potential buyers. Duty remains payable, however, on land or leasehold interests.
2. Identifying Your Business Successors
If you are looking at an internal transfer, you will need to separate emotion from business logic. Your eldest child does not necessarily make the best CEO. You need to assess skills versus seniority. Does the potential successor have the leadership ability, the grit, and the financial literacy to steer the ship?
If you plan to train a successor from within, start early. If no suitable internal option exists, begin exploring external candidates or sale opportunities.
3. Financial and Tax Optimisation
Business transfers often trigger significant tax events. Strategic planning can minimise or defer tax payable.
Australia’s small business CGT concessions are generous but complex. Generally, they may apply when a capital gain arises on an active business asset and the business satisfies the basic conditions, including either:
- aggregated turnover under $2 million, or
- maximum net asset value not exceeding $6 million (with certain exclusions).
If eligible, the four main concessions are:
- 15‑year exemption (possible tax-free exit if you’ve owned the asset for at least 15 years and you’re 55 or over, retiring or permanently incapacitated)
- 50% active asset reduction (if basic conditions are met)
- retirement exemption (lifetime cap of $500,000)
- small business rollover (defers CGT by reinvesting in a replacement active asset within the allowed timeframe)
4. Establishing a Transition Timeline
A well-planned exit takes time — typically three to five years. This allows you to train successors, strengthen profitability, and reduce reliance on you personally. A business that cannot operate without its founder is difficult to sell, so transferring relationships and knowledge is essential.
5. Legal Documentation and Agreements
Finally, formalise your plan through appropriate legal instruments.
A Buy‑Sell Agreement (linked to or separate from a Shareholder Agreement) sets out what happens if an owner dies, becomes disabled, or leaves the business. These agreements can also include funding mechanisms, often via insurance policies or vendor finance, to allow remaining owners to buy out a departing partner’s interest.
Always seek professional advice when preparing these documents and arranging insurances.
Common Pitfalls to Avoid in Succession Strategies
- Leaving it too late. Rushed exits rarely achieve optimal value.
- Keeping it secret. Informing key staff at the right time promotes confidence.
- Ignoring relationship dynamics. Family or partner conflicts can derail transitions.
- DIY planning. Succession and tax law are complex; professional advice is non-negotiable.
Secure Your Legacy Today
Leaving your business is inevitable but doing it poorly can be avoided. A robust succession strategy protects your wealth, your family, and the future of those who helped build your success.
It allows you to exit on your terms, at a time and value that reflect your effort. Don’t wait for a crisis to force your hand. Start planning today and protect your legacy with confidence.
For expert legal guidance on structuring your exit, buy-sell agreements, and associated transactions, reach out to Revolance Legal via phone 02 9266 0688 or email [email protected].
Disclaimer: This article provides general information only and is not intended as legal, financial, or taxation advice. Readers should obtain professional advice tailored to their own circumstance.
Frequently Asked Questions
What is a business succession planning checklist for Australia?
A checklist helps you stay organised. In Australia, key items include obtaining a market valuation, reviewing business structures (trusts/companies), updating your Will and Powers of Attorney, drafting a Buy-Sell agreement, and consulting a tax adviser about CGT concessions.
How does capital gains tax affect selling a small business?
CGT is a major consideration on any profit from selling your business. However, Australia offers four specific Small Business CGT Concessions that can reduce, defer, or even eliminate this tax if you meet certain eligibility criteria and specific conditions.
When should I start planning my business exit strategy?
Generally, starting 3 to 5 years before you intend to leave provides a “runway”, and allows you to improve the business value, train a successor, and structure finances to minimise tax, reducing the stress of the eventual transition.
Can I use insurance to fund a buy-sell agreement?
Yes, this is common. Business partners often take out insurance (Life or TPD) on each other. If a partner dies or is disabled, the payout provides the remaining partners with the cash to buy the exiting partner’s share from their estate.