Welcome to the fourth instalment
Welcome to the penultimate issue of our limited series Decoding Financial Success for Business Owners: The 10 Factors You Need To Know. To date we have explored numerous issues such as:
In this issue we will discuss the different building and growth structures available ad the key features of each, plus we also take a look at the need for succession planning.
7. Building and Growth Structure
Choosing the appropriate business structure can significantly impact various aspects of your business such as risk management, tax management and compliance obligations. Outlined below are the primary business structures:
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Sole Trader
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Partnership
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Company
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Trust
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Whilst there is no superior choice when it comes to selecting a business structure, each has its own advantages and disadvantages, which need to be taken into consideration alongside your personal circumstances.
Whilst choosing the business structure is essential when starting a business, it’s also important to think about any structures you might require for the ongoing management of the business.
A well-thought out advisory board is an internal management structure that can facilitate the long-term growth and longevity of the business.
An advisory board, which consists of a mix of professionals such as retired CEOs, industry specialists, business lawyers, accountants and more, can amplify the skill base and experience of a business, helping to fill gaps in management capacity, provide valuable insights around potential challenges, as well as add years of experience, all of which supports accelerated business growth.
Not only is the structure imperative with regards to the start up and ongoing management stages of business, it is just as equally important come exit time.
The old adage “start with the end in mind” applies to all business structures. Much like you would never start driving without a destination, you should not start a business without considering how you will exit it.
Whilst we explore succession planning and exit strategies in point 8 below, these approaches are suited to a sole trader. However, when it comes to planning ahead for partnership or company structures it becomes more complicated but even more necessary as you don’t want your future to be at the mercy of another individual’s desires or personal situation.
A succession plan that is developed in conjunction with the establishment of your structure and business plan can help reduce uncertainty and protect against the unexpected or unplanned exit of business partners. It should outline their exit strategy as well as address matters such as long-term illness, TPD or death, and effectively operate to secure the survival of the business through any transitions in ownership.
For partnerships it is important to designate a successor or agree to the stipulations around the sale of a partnership or shareholder stake. Whilst this may not seem like an issue now, it can rapidly become contentious and a threat to the viability of the business. Some elements that need to be considered when succession planning include identifying your replacement ahead of time, estimating the value of the business, potentially establishing buyback agreements and more.
When payroll becomes problematic
Payroll can be one of the biggest expenses and financial challenges for many owners. So how exactly does one make sure that the labour cost is optimal – with little time leakage and increased staff productivity? Individual events of time leakage can add up collectively, across all staff members throughout the year and become a real profitability issue. The addition of an automated job costing system can be the answer to this particular challenge. Ensure that cash is put aside to cover employee wages, taxes and superannuation payments.
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8. Succession Planning
A succession plan is a strategy for identifying, developing and transitioning a new leader or owner for a business for when the current owner leaves the business for retirement, health or other reasons. With a well-constructed succession plan, the business you’ve worked hard to build can continue to run smoothly without you.
When succession equals success
A succession plan that is aligned with your business structure will help to ensure your business has a focused trajectory towards sustainable growth alongside a clear vision for the future.
However, when it comes to closing the curtains on a business and moving onto the next stage of life, most business owners don’t have an exit plan. In fact, 70% of small businesses are left without a buyer or successful plan for what happens when the curtain comes down.
When it comes to planning how to exit your business and move onto the next stage of your life, there are two primary ways to bring down the curtain: an exit or a succession.
An exit strategy
In an exit scenario, you are either selling or shutting down the business. If you wish to sell your business, you need an idea of the value. In fact, even if you aren’t looking to sell, it’s smart to always have a ballpark idea of its market value. Experts advise looking at what similar firms have sold for recently, consider qualitative factors such as whether executives plan to stay on and decide what payment terms you’ll accept.
A succession
In a succession situation, you’re turning the reins of the business over to the next leader. This is a strategy to cede control of the business to one or more people, or an acquirer. If the former applies you will need to decide whom you will pass the business onto and commence training them for the role well in advance.
Selecting the right business structure and establishing an effective succession plan are both integral parts of a successful business and secure financial future. At Profile Services we can help you build the right frameworks that grow and preserve your wealth as well as ensure your future wishes are met.
Join us for the final part of this series where we explore estate planning and the importance of delineation between your personal and business finances.
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