We are in the midst of the retirement of a huge number of the baby boomer generation, many of whom are business owners and may not have planned for the future. The lack of a formal succession or exit plan can have serious consequences for the business and the owners.

The best outcomes are when succession discussions begin well in advance of any actual transfer or retirement.  It can take some time to deal with all the relevant issues, concerns, unique business and family dynamics, and emotions in such an important step. A number of meetings and discussions may be required so an effective plan can be put in place which safeguards both the transfer of the business (with the right structure) and the value of that business.  Often this planning needs to be commenced years in advance.

The business succession plan can be quite simple – for example to sell or wind up the business and distribute the proceeds among the family/shareholders or even to transfer the business to one of the children or managers who has historically been involved in the business. However, some succession plans need to be more complex and include multiple parties exiting, continuing or being introduced, as well as associated issues such as paying out funds to those that are leaving and raising funds for those who will continue.

A trust can work well (whether created before or on death) which holds equity in a family business and detailed arrangements to deal with the exit and entry of the parties and to guide the succession and even the operation of the business in the future.  There are also a number of corporate and commercial mechanisms that can assist greatly such as ‘put and call’ options for shares, ‘drag and tag along’ provisions, rights of first refusal, rights of pre-emption, redeemable preference shares, shareholder/beneficiary loan accounts, minority shareholder protections, employee share schemes, family share schemes and earn out provisions.

It may make sense for some business owners to set plans and rules for the future direction of the business. Others may not want this level of prescription or involvement and may be happy to allow the new owners flexibility to operate the business as they see fit.  It will come down to the nature of the business and the personalities involved.  Getting this right is incredibly important and can be complex.

If you are involved in a business, facing such issues in the near future or would simply like to start planning for succession no matter how long away that may be, then please feel free to give me call or make an appointment to discuss further, Kent Yeoman, Principal (03 343 8453 / kent@mmlaw.co.nz)