What is Family Succession?

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Business owners who have invested a lot of time and money growing may strongly feel the need to retain ownership of the business within the family when they exit.

If you are looking at handing over the reins of your business to a relative, either by gifting it or selling it, you must consider the impact it would have on both your business and your family.

Selecting a successor in the family

What’s best for the future of the business should always be given top priority when choosing a family successor. While you may wish to secure your children’s future by leaving them the business, it could create problems if they don’t really want to take responsibility for it. You must choose a successor that possesses both the required skills and dedication to lead the business forward. Don’t let emotion rule your decision. You can benefit from creating a board of non-relatives to gain an impartial opinion.

Problems could arise when picking a successor. Naming just a single successor may create disputes if other family members are also interested in heading the business. Alternatively, naming more than one successor could bring about disputes because there is no obvious leader. Major problems could also arise if the successor(s) fail to come to an agreement on how the company should be run.

Ideally, the role of successor should be earned, not just inherited. To find out how suitable and committed a potential successor(s) is, set up a trial period during which they would be assigned to work in all areas of the business.

Ownership and management

The method of transferring both ownership and management is a major consideration in family succession planning. Use the following questions as a guide when planning family succession:

  • Will both ownership and management be handed over to relatives?
  • Will the business be equally owned by the family members?
  • Will non-family members be given management roles?
  • Do you have to modify the goals and long-term targets of the business?
  • What method do you use to quantify the success or performance of the business?
  • Who are the family members who will take active participation in the business? What are their duties and responsibilities?
  • Will there be relatives who will take non-active ownership?
  • Is training or mentoring needed by your successor?
  • Do you wish to take on an adviser role after you hand over ownership of your business?

Financial and legal matters

Consider the legal and financial impact of family succession and add these in your succession plan:

  • How are you transferring the business to your family: by gifting it or selling it?
  • Is creating a trust required as part of the succession? There are tax implications when you set up a family trust to own and run the business on behalf of your children.
  • Will you get the business’ market value if you are selling it to a relative? Make sure you are rewarded justly for all the work you have done for the business and avoid financial disagreements by obtaining a professional valuation.
  • Which would you prefer: receive a regular dividend from the business or get a lump sum?

Before selling all or part of your business, make sure to obtain professional legal and financial guidance.

Communication and dispute resolution

An important aspect of family succession planning is open communication. Both family and key staff should be included in any decision-making associated with the future management and ownership of the business. Their views and opinions are important. Look over the plans regularly with relatives to ensure they are up to date and content with the progress.

Having a process for resolving disagreements is also essential. Emotion cannot be totally eliminated in family businesses. So it is a good move to get an objective opinion from a trusted third party such as a lawyer, accountant or family business adviser.

Get help when taking on a family succession process for your business. PJS Accountants offer a host of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. We have been dealing with local businesses in Capalaba, Cleveland and the Redlands for over 30 years. Our team is always available to take your call and help with your business needs. For enquiries, contact PJS Accountants.

The Most Common Ways of Exiting a Business

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At some point, every business owner will decide to exit their business. There are various reasons why this happens. These include declining profits, growing competition, shift in life goals or health, retirement, or handing over the business to family members. Some may even exit their business because they can’t keep up with its growth. Exiting a business is sometimes done voluntarily, while others are forced to do it.

Preparing for exit is important as the process can involve fulfilling a host of monetary, legal and operational requirements. Your goal is to make sure your business is in good shape before you exit.

Preferably, you should include an exit strategy in your primary business plan. You can find out about the different exit strategies available for your business by talking to your solicitor or financial adviser.

Here are the most common methods to exit a business:

Succession planning

If it took you years and a lot of effort to develop and expand your business, the thought of just selling your business to another party may not be to your liking as you may prefer to pass it on to a family member. This method of exit strategy is called succession planning.

Succession involves making sure the existing success of the business continues with a hassle-free transfer of ownership. This needs a huge amount of planning. In a formal succession plan, who will take over the business, when they would take over and how they will take over must be clearly defined.

Shutting down the business

It may be hard to sell a business that is declining. If this is the case, it may be better to close it down. There are a lot of things involved in closing a business, including divesting business assets, paying debts and retaining whatever money is left.

When closing a business, there are many legal obligations involved, as well as monetary and emotional costs. You, your employees and other stakeholders in your business will be affected by these factors.

Selling your business

This is typically a major decision for a business owner. When planning to sell your business, you have to make specific decision regarding the why, when and what you are divesting and the person you are selling your business to.

In money terms, the best time to sell is when a business’ sales and profits are up. Your business will get a higher value and will attract more prospective buyers.

Contact PJS Accountants to help you plan your strategy for a successful exit from your business. We provide a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. We have been dealing with local businesses in Capalaba, Cleveland and the Redlands for over 30 years. Our team is always available to take your call and help with your business needs.

Preparations for BOFY (Beginning of Financial Year)

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That time of the year when every business is advertising their product or services, taking advantage of the “End of Financial Year”, has just ended. It’s great to be up to date with as many tax deductions as possible, but what plans are you making for “Beginning of Financial Year”, which started this July?

Most probably, if you are running a business, you aim to improve your profits. Here are the important things that businesses should pay attention to in order to achieve sustained and higher profits this year:

Sales / gross profits

Study your sales and profits by region, product, service, customer, etc. to identify which ones you must pay attention to this year. Maybe you should scrap some that are slowing your business down. Consider new prospects that open as a result of shifting business conditions.

Do not be a victim of “Digital Disruption.” Learn to survive it and take advantage of it by seeking help in the area of online/digital marketing. Unless your business only targets customers that are more than 65 years old, you need to establish an online presence. Meet with your staff to conduct a strategic planning session or hire someone to help you. Discuss ideas for achieving sustainable sales growths.

Costs

Explore ways your business can obtain supplies more cost effectively and efficiently.

For service businesses, labour hours is a great opportunity to attain improved productivity. Carefully review the productivity of each team member, i.e. how much of their working hours are you able to bill to clients? Profitability can be heavily impacted by minor changes in work practices. Find out if you are selling all the hours that you’re paying for.

Pricing

Give honest answers to these questions:

  • When was the last time you raised prices?
  • Are you feeling worried that customers will abandon you if you do this?
  • Will you be able to continue bearing the margin squeeze due to increased costs without raising prices?
  • What is your overhead this year versus the past two years?

If you are facing strong competition, fight back by reducing your costs or by justifying to the market why they should buy your better product/service for a higher price. You have to promote your product or service by providing details on what makes it better than others in the market, longer lasting or whatever makes it stand out.

Overheads/net profit

Ask yourself these questions after looking closely at all your overheads:

  • What are the reasons we are spending this money?
  • What are the contributions of these expenses to the business and its profitability?
  • Is it right to halt the spending on this item?
  • Is there a better alternative to achieve this?
  • Should we look for a new supplier – if only to prompt the existing supplier to sharpen their pencil on this expense?

It is indeed beneficial in some cases to set up an atmosphere of rivalry among suppliers. You shouldn’t take your value as a customer to them lightly.

Customer payments

How do you compare the average number of days it takes you to be paid by customers to the terms you offer? Very few business owners are aware of the big difference between these two items and the problem it can cause on cash flow if the gap is huge. Reduce this number by working it out and setting a goal.

Supplier payments

Work out the number of days it takes you to pay suppliers versus the terms they offer you. If you are not leveraging every day of the terms offered, you could be making a needless cash flow problems. It would do your business good to negotiate for better terms from suppliers – especially if you are a major customer and they have strong competition for your business.

Stock management

What’s the amount of inventory you require on hand at any particular time? Consider the inventory in dollar terms sitting in your stockroom that could be spent on other things, such as marketing to sell more and empty your stockroom faster. It’s tempting to purchase items in bulk to get discounts. However, if the inventory will sit unmoved taking valuable cash, you may be better off purchasing in smaller amounts. Think of ways you can reduce the quantity of your inventory.

Job management

If you discover that you have money tied up at any given time for on-going jobs, discover ways to hurry up the time it required to obtain payment on jobs, such as progressive invoicing, deposits, etc.

This year, create a plan to pay attention to these important elements of your financial management and you will definitely see profits and cash flow increase in the next financial year.

Prepare not just for the end of financial year but also for the beginning of financial year to improve your profits and avoid cash flow problems. Hire professionals to help you make these preparations. PJS Accountants provides a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. We have spent more than 30 years dealing with local businesses in Capalaba, Cleveland and the Redlands. Our team is always available to take your call and assist you in whatever business needs. For enquiries, contact PJS Accountants.

New Tax and Legal Changes for Businesses Effective 1 July 2016

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Many changes for Australian small and medium businesses come on 1 July each year.

With the new financial year now underway, there are a host of tax and legal changes that SMEs need to know about.

Here are the changes that SMEs need to know about:

Rise in minimum wage

Effective 1 July 2016, the Australian government has increased employees’ minimum wage by 2.4%. Full-time employees can now receive a minimum of $17.70 per hours, or $672.70 weekly, up by about $15 weekly.

It is important for businesses to know about this as all awards must change to mirror the new minimum wage.

Amendments to the country of origin labels

The changes to the country of origin labels also became effective on 1 July 2016. With the changes, consumers will be able to get more information as to the origin of the ingredients in the products they are purchasing. In the past, the information on whether a product was made or grown in Australia is included on product packaging. But now businesses are required to specify on the packaging the smallest proportion of Australian ingredients by percentage.

A good number of businesses in the food sector would already be informed about these changes, but still businesses have been granted a two-year grace to implement the new labels. The new rule would then be mandatory effective 1 July 2018.

Change to the high-income cap for unjust dismissal

Starting 1 July 2016, the high-income limit for unjust dismissal has been upped to $138,900 per year from $136,700. The government has also increased the compensation threshold for unjust dismissal claims from $68,350 to $69,450.
Business owners should also know that unjust dismissal rules now include employees with earnings above $136,700 and below $138,900.

Amendments to SMSF laws for collectables and personal use assets

Self-managed superannuation (SMSF) funds having collectables and personal use assets owned before 1 July 2011 will no longer be exempt effective 1 July 2016. These assets include items such as jewellery, artwork, boats, vehicles and wines.
The ATO now requires that such items be made solely for retirement purposes, not for present-day benefit.

Tax break for people wishing to change business structures

Qualified small businesses will no longer incur capital gains tax liability when they change the legal structure of their business.

The new rules give qualified small businesses access to an optional rollover provision when they hand over an active business asset to another small business entity as part of a real business structure change. But businesses have to be eligible by not changing the “ultimate economic ownership” of the asset.

Four months to prepare for SuperStream

The deadline for small businesses to comply with the ATO’s SuperStream system was originally 30 June 2016. However, the deadline has been extended to 28 October 2016.

Under SuperStream, small business owners are required to pay the super contributions for their employees electronically in a standard data set.

Small businesses that missed the original deadline will not be subjected to any compliance action.

Meet with a qualified tax advisor, accountant or bookkeeper for tax enquiries and to be updated with legal and tax changes. PJS Accountants can help you organise your tax affairs. We work with large companies, SMEs, family businesses and individuals. For enquiries, contact PJS Accountants.

What is Non-Family Succession?

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In cases where no family member is interested in taking over your business or if you do not have a potential successor in your family, there are two options for non-family succession:

  • Buy-sell option – selling your share of the business to other owners
  • Management buyout – selling your business to employees

Buy-Sell Option

For a business that is a partnership, the buy-sell agreement is available to them. How the remaining partner(s) will purchase your share of the business when you die, become disabled or retire can be determined by buy-sell agreements.

These are the items that are explained in buy-sell agreement, a legally binding contract:

  • When owners can divest their shares
  • Parties that can buy the owner’s shares
  • How much is the value of the owner’s shares
  • Where the financing will be obtained to pay for the owner’s shares

Insurance will be a crucial part of any buy-sell agreement as your co-owners may have insufficient funds to purchase your interest in the business, and the business will need to be liquid to maintain its operations after you turn over ownership.

Management buyout

Management buyout, or selling the business to managers or employees is a common succession strategy for small and medium-sized businesses. However, there are both advantages and disadvantages with a management buyout:

Pros

  • Both the old and new owners will have some assurance of the business’ future.
  • Employees already have the knowledge about the business’ strengths, weaknesses and culture.
  • There is already an established relationship with suppliers and customers.
  • Employees may feel more assured that their jobs are secured. When selling in an open market, outside buyers may have a mind to replace employees with their own.
  • Owning an interest in the business can strengthen productivity, innovation and morale. This is brought about by the shift in mindset from employee to owner.
  • New owners will be more committed to making a success of the business as profits will go to them.
  • There is no need to sell or reveal classified information to a rival in business.

Cons

  • Training may be needed for the management buyout.
  • A dispute may arise over the purchase price.
  • The financing should meet the requirements of the seller but also have enough remaining to keep the business in operation. Major problems can arise if a buyout leaves no cash after the sale.
  • Managers may only be interested in the buyout to continue having a job. They may not have the funds or knowledge to run the business in the long term.
  • If the buyout fails, you have to cautiously handle relationships between you and the staff.

This process must be handled over time and communicated in a straightforward manner. Have professional advisers on hand to help management with each step of the process.

Seek guidance when undertaking a management buyout of your business. PJS Accountants provide a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. We have been dealing with local businesses in Capalaba, Cleveland and the Redlands for over 30 years. Our team is always available to take your call and help with your business needs. Contact PJS Accountants for enquiries.