Structuring for Succession
Implementing succession into your professional firm can be an extremely daunting thing. For most, this can be a new experience. For others, this maybe a second attempt at a bad succession strategy. Regardless of the reason, many questions are common in any succession.
The most frequently asked questions I get are:
- I’m wanting to retire, but don’t know how
- What is my current practice worth?
- Who is going to buy it?
- How will I be paid?
- Over what period will my succession process last?
- What are the tax implications?
- The two biggest questions that come from a selling practitioner once the decide they want to sell are:
- How do it do it?
- What’s the firm worth?
- The first thing I need to tell you is … the closer to exit date without any plan the lower the value.
Considerations for enabling succession
To drive growth in your value, you need to increase your profits and reduce the risk. If you are considering your succession strategy and it is still a couple of years away, you need to start implementing strategies now to drive the value upwards.
To enable succession, you first need to put yourself in the potential purchaser’s position. This is harder than you think as you will always take a bias viewpoint of your own interest.
Many practices have engaged my services to manage the process just for this reason. Some taking up to two years to transition and agree because of said parties involved.
When enabling succession, you need to make the firm attractive. Key areas that need consideration are:
- Current legal structure
- Current debt and cash flow structure
- Funding that is available
- Distribution strategy
- Risk mitigation
- Partnership criteria
What are the common succession pain points?
You may have an idea of how you can exist your practice, or even how to make it more attractive prospective purchasers, but what about the biggest challenges you will face during the succession process. The most common challenges that I see facing practitioners are:
- Lack of consensus
- No defined strategy
- Assuming instead of agreeing
- Agreement on valuation
- Current structures are inhibiting
- Deciding on a successor
- Bias decision making
- Timing of succession
- Letting go
Prepare detailed strategy and advice document for the firm to implement the plan, including step-by-step project implementation action plan regarding:
- Consider Incorporation to make it easier for the new partner
- CGT implications and procedures required to apply the small business CGT concessions to the sale by the partnership and restructure to an ILP, including personal taxation impact for each partner
- Debt restructuring implications and deductibility
- Review your current finance structure, both personally and business, and develop a debt strategy to retire debt and support your business cash flows
Consider preparing a valuation for your practice for capital gains tax purposes and to support the correct allocation of purchase price of Goodwill as the transactions are between related parties