Small Business Succession Planning

Many self-employed people overlook the value of the businesses they create, but with prior planning, this value can make the difference between a moderately comfortable retirement and an enjoyable one with few money worries.

Chris, a graphic designer working from an office in his converted garage, is a typical example. He plans to retire in a few years and has always assumed that the business will close down when he delivers on his final brief.

Like many self-employed people, Chris has neglected his superannuation, and his retirement nest egg is much smaller than it should be.

Chris needs to understand the value of the loyal client list he has built up over the years. Those clients will continue to need graphic design services in the future, and their spending will provide an ongoing income stream to the business that services their needs. If Chris can transfer his clients’ loyalty to another graphic design business, then it represents an asset he can sell. Its potential value could be in the hundreds of thousands of dollars – quite a boost to Chris’ retirement savings.

Chris could explore a few options. For instance, he could employ an assistant who has the potential to buy his business. Or he could sell the business to a large, established design studio and continue to work with his clients while transferring their loyalty to the new firm.

Any sale proceeds will be treated as a capital gain, which would normally be subject to tax. However, a number of concessions are available to small business people, particularly in relation to retirement. These concessions should reduce or eliminate any capital gains tax payable on the proceeds of the sale of the business.

Business succession is an issue that confronts a wide range of small business operators. The specifics of each succession plan will vary from business to business. Implementing required changes may present a significant challenge for independently-minded business owners. After all, it means progressively giving up control and letting go of the day-to-day running of something they have created from their own hard work. An effective succession plan is part of your financial planning strategy. Converting a business into an asset that can be sold for a six or seven figure sum could prove to be the most profitable use of your time between now and your retirement.

In addition to seeking the advice of a financial adviser to ensure super, tax and other financial issues are properly dealt with, it might be worth talking to a business consultant who can help to design and guide your succession strategy.

If you’re a small business owner, ask yourself, what does your business succession plan look like?