How Does Divorce Affect My Succession Plan?
Written by: Adam Ramage l Accounting Team
If we start with the words of Benjamin Franklin, way back in 1790:
“If you fail to plan, you plan to fail.”
You will understand why Canny Group love a good plan!
And whilst we may not want to “plan for divorce”, the reality is that many marriages do end in divorce. This means business owners should be aware of how divorce can impact their business, and how it can impact their business succession plan.
So, what is a succession plan? A plan to ensure the current business owners can extract maximum value now and in the future from the business.
Why would a succession plan cover extracting value now, and not just in the future? Well, whilst many businesses may rely on the owner(s) as the key person(s) to manage the business, many businesses deliver value via:
- Key Employees;
- Key Business Operational Methods; and
- Key Customers and Suppliers.
So, a good succession plan should not just cover an exit for the business owner(s).
The plan should reference document systems to support the continued operations of the business in the event that, say, a key employee or supplier is no longer available to the business.
And yes, the succession plan should also ensure that the business owners are able to extract the maximum value should they elect to exit, which should take tax on any proceeds of that exit into account.
Key Steps To Establish a Succession Plan:
- Identify key positions and systems in your business
- Determine the capabilities required for key positions
- Identify potential successors and asses them against capabilities
- Put development plans in place to cover any capability gaps
- Document your key business systems to enable effective knowledge transfers and continued operations
- Identify funding options for the succession plan, including by sale
- Identify tax implications of the succession plan
- Communicate your plans and steps above to potential successors
- Evaluate the effectiveness of development plans, systems documentation and commitment of identified successors
Committing to the above steps will provide options for key people within your business, or related parties. It will provide an operational map for the business to continue without you leading, and this operational map could be vital if the option of business sale is pursued, as a purchaser will see how the business will continue to operate without you involved.
Where Does Divorce Fit Into The Succession Plan?
Remember above we said a succession plan is:
A plan to ensure the current business owners can extract maximum value now and in the future from the business.
Failing to take the possibility of divorce into account can expose business owners to the impact of a court-imposed property settlement. Or a settlement negotiated without the benefits of advanced planning. The value of business assets held will generally be taken into account in divorce proceedings, and so need to be considered in a succession plan.
Every relationship/marriage will be different and there is no “one solution fits all”, as the current business structure and current financial commitments and agreements will impact the requirements to protect the ongoing operational value of the business.
Businesses can operate through companies, trusts and partnerships and you may even be operating your business as a sole trader. Each of these will have differing considerations in protecting the business. Importantly, there are options for each of these operational structures that can be implemented, and we recommend working with your accountant and legal adviser to identify the options that will meet your specific needs. And you should do this before you need it!
Help From Your Accountant
Your accountant can assist with establishing your succession plan and guiding you through the eight steps above, taking your individual business and personal situation into consideration, and ensuring that your succession plan is tailored to your needs.
Want to know more about succession planning and how your Accountant can assist you? Check out this previous article we put together: Succession Planning Is Not Just A Collection of Buzzwords!
Help From Your Legal Team
Your legal team or legal adviser can help you to understand the options available to protect your assets in the unfortunate event of divorce and implement strategies and structuring to limit any impact. Commonly the family court will seek to “look through” the business structure to identify the underlying assets and the holders of those assets, which means working with your legal adviser to protect the business, is paramount.
Returning to the warning that you do not want to be facing a court-imposed property settlement that affects your ability to continue business operations or enact your succession plan in a manner that ensures you obtain maximum value now as well as in the future.
The following is not intended as “scaremongering”, merely stating the facts. The most recent statistics show that there were 56,244 divorces in Australia in 2021, a rate of 2.2 divorces per every 1,000 Australian residents. We are therefore recommending that you do consider divorce in your business protection and succession plan.
Canny Accounting + Your Succession Plan
What is your exit plan? You’ve been working on your business and within your business for so long but have you stopped for a moment to consider what you would like to happen when it’s time for the next chapter? Does that plan include planning for road bumps along the way?
Canny Accounting has been assisting businesses, big and small, with their business accounting from start to finish for over 60 years now.
When done properly, succession planning adds value to your business while keeping stakeholders informed and it also allows your business to succeed beyond today. There are a number of key components to a succession plan, and your business will have its own unique components that need to be considered individually and as a whole. This includes planning for the possibility of there being a relationship breakdown.
Get in touch with our team to have a chat about your succession plan and to ensure that all the bases and considerations have been taken into account.
