Business succession

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This presentation provides an overview of implementing a business succession plan and discusses key concepts including ownership, revenue, and asset debt protection. The presentation also explores the key legal issues involved in succession agreements and funding issues.

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Business succession

  1. 1. Business Succession Matthew Burgess Partner April 2013
  2. 2. Learning objectives ■ Understanding a business succession plan ■ Develop a strong understanding of key concepts □ ownership □ revenue □ asset debt protection ■ Understanding the key legal issues and succession agreements ■ Understanding funding issues 20051773 2
  3. 3. Overview Why How What 20051773 3
  4. 4. Why ■ Legal is foundation ■ But not more ■ Demystify ■ Empower with experience 20051773 4
  5. 5. 20051773 5
  6. 6. 20051773 6
  7. 7. 20051773 7
  8. 8. 20051773 8
  9. 9. 20051773 9
  10. 10. 20051773 10
  11. 11. 20051773 11
  12. 12. How ■ Plan A and Plan B ■ Legal framework ■ Tools 20051773 12
  13. 13. What ■ Legal concepts ■ Practical examples ■ Interactive 20051773 13
  14. 14. 20051773 14
  15. 15. 20051773 15
  16. 16. Succession Plan A and Plan B ■ The business succession plan ‘A’ (shareholders agreement) includes □ retirement or sale □ resignation □ other exit conditions (divorce, bankruptcy) ■ The business succession plan ‘B’ (buy/sell agreement) includes □ death □ disablement □ critical illness 20051773 16
  17. 17. Exit options Today Voluntary Exit Death Involuntary Exit Business Succession Planning Estate Planning Trigger Events Plan A- (VOLUNTARY) Retirement, Resignation, Sale, Divorce Plan B- (INVOLUNTARY) Death/Disability/Trauma 20051773 17
  18. 18. 1 20051773 18
  19. 19. Business insurance overview ■ Adviser roles ■ Start-up v mature ■ Principal v entity 20051773 19
  20. 20. Structures ■ Sole trader ■ Partnerships ■ Companies ■ Trusts ■ Hybrids 20051773 20
  21. 21. Trusts ■ Four key roles ■ Appointor ■ Corporate entities ■ Varieties 20051773 21
  22. 22. Example 20051773 22
  23. 23. 20051773 23
  24. 24. Entity interplay ■ Operating entities ■ Ownership entities ■ Service entities ■ Retirement (super) 20051773 24
  25. 25. Asset protection ■ Debt reduction ■ Types of debts ■ Ownership choices ■ Business v self v super 20051773 25
  26. 26. Asset protection – case study ■ Peter and Mary own 50% of the shares in their family company ■ Company borrows $2 million ■ Insures each for $1 million 20051773 26
  27. 27. Revenue protection ■ Revenue sources ■ Policy ownership ■ Deductibility ■ Record keeping 20051773 27
  28. 28. Revenue protection ■ Equity/debt reduction is not key person ■ Allows the business to carry on ■ Some owners may be key persons, some may not ■ Employees may be key persons 20051773 28
  29. 29. 20051773 29
  30. 30. Revenue v capital ■ Capital □ non-deductible □ non-assessable ■ Revenue □ deductible □ assessable ■ Question of fact 20051773 30
  31. 31. Ownership protection - overview ■ Overview of succession planning ■ Buy-sell arrangements ■ Policy ownership ■ Recent improvements 20051773 31
  32. 32. Buy/sell agreements ■ Mandatory buy/sell agreements □ history □ how they work □ CGT problems ■ Put and call options ■ Other strategies 20051773 32
  33. 33. ‘Triggering events’ ■ Death ■ Total and permanent disablement ■ Trauma 20051773 33
  34. 34. 20051773 34
  35. 35. Pricing of buy out ■ Fixed in agreement ■ Regular review ■ Accountant, valuation, market value ■ Shortfall ■ Repayment periods ■ Interest/security ■ Loans 20051773 35
  36. 36. Funding solutions ■ Self funded ■ Borrow ■ Pay in instalments ■ Sell interest to third party ■ Insurance ■ Sell assets ■ Liquidate 20051773 36
  37. 37. Insurance funding ■ Ownership ■ ATO discussion paper ■ Superannuation ■ Product ruling 20051773 37
  38. 38. Ownership Super Self Trust Company Hybrid 20051773 38
  39. 39. Super owned Plus Minus Tax deductibility on contributions to pay premiums Death benefits can only be paid to beneficiaries as limited by legislation Premium funding (Super fund pays premiums not insured) May make the fund Non Complying Removal of RBL’s – 1 July 2007 Would need careful drafting of the associated documentation More favourable tax treatment of TPD (particularly self employed) Potential tax on TPD benefits if Life Insured is under age 60 at time of claim Binding nominations can be made Critical Illness premiums are not generally deductible Critical Illness tax Flat rate maximum deductible contributions Claims settlement and access - possible delays 20051773 39
  40. 40. Trust owned Plus Minus Avoids CGT on insurance proceeds:  policy owned by Trustee on behalf of Life Insured  Life Insured is the beneficial owner CGT payable if absolute entitlement trust not accepted by ATO One policy:  covers several needs  reduces policy fees  may provide annual premium volume discounts Obtain comprehensive ATO approval before proceeding – product ruling 2010 Can provide for quick settlement, as policy proceeds are held outside of the estate May be documentation and administration costs Trust Deed embodies rules covering application of policy proceeds Insurance benefits can be varied without amending ownership 20051773 40
  41. 41. Example 20051773 41
  42. 42. Self owned Plus Minus Proceeds are paid quickly into the estate Good documentation to protect interests of all parties is required Should avoid CGT on TPD or Critical Illness benefits Cost inequalities The Insured can take the policy with them after they leave the business No deductibility 20051773 42
  43. 43. Company owned Plus Minus Can pay premiums out of the company cheque book Potential for CGT on TPD or critical illness benefits Company may buy back the shares which can simplify the settlement process Proceeds into the company may compound the problem by increasing the value of the business Money may be tied up in the company Could be issues on getting money out Proceeds under control of remaining directors As the surviving party acquires an additional interest in the business for no further consideration, this method can give rise to less than desirable CGT implications on later sale of business 20051773 43
  44. 44. Hybrid model Plus Minus Avoids CGT on insurance proceeds:  policy self owned  issue of “absolute entitlement” or “bare trust” does no exist Good documentation to protect interests of all parties is required One policy  covers several needs  reduced policy fees  annual premium volume discounts Additional documentation required to be built in to ensure key person or debt protection covers are paid to the business and CDF liabilities avoided Policy proceeds are paid to the estate Cost inequalities Insurance benefits can be varied without amending ownership Involvement of lawyer means almost impossible to omit agreements from process 20051773 44
  45. 45. 20051773 45
  46. 46. What we are seeing in the market ■ Self ownership/super ■ Option agreements ■ Structuring of arrangements ■ Keep it simple ■ Total package ■ Hybrid 20051773 46
  47. 47. Other factors ■ Lenders interest ■ Loan accounts ■ Consolidated policies ■ Trusts and absolute entitlement ■ Division 152 20051773 47
  48. 48. Other factors ■ Release of guarantees ■ Internal loan accounts – both debit and credit ■ Insuring for CGT ■ Asset holding entities □ do they have the power to gift □ CGT – deemed market value consideration ■ Commercial debt forgiveness 20051773 48
  49. 49. 20051773 49
  50. 50. Implementation process ■ Facilitate the process ■ Provide background material ■ Recommend funding ■ Obligation free fixed fee quotes ■ Keep it simple ■ Bespoke or elawyer 20051773 50
  51. 51. Plan A – shareholders agreement ■ Activities of the company ■ Involvement in business ■ Funding of the company ■ Management of the company ■ Decision making 20051773 51
  52. 52. Plan A – shareholders agreement ■ Restraint of trade ■ Pre-emption arrangements ■ Deadlock ■ Termination of agreement ■ General matters 20051773 52
  53. 53. Plan B – buy sell ■ Overview ■ Buy option ■ Sell option ■ Trigger events ■ Price ■ Completion 20051773 53
  54. 54. Plan B – buy sell ■ Loans ■ No insurance ■ Proceeds ■ General ■ Specifics 20051773 54
  55. 55. Example 20051773 55
  56. 56. Contact Matthew Burgess Partner T +61 (0)403 209 977 E mburgess@mccullough.com.au Disclaimer: This presentation covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. This presentation is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this presentation. 20051773 56

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