Business Succession – My New Business Partner

When starting a business the last thing that many new business owners give consideration to, or sufficient consideration to, is what will happen in the future when the new business owner or an existing joint business owner either wants to exit the business or, through death, illness or disablement, is forced to exit the business.

A recent Succession Report prepared by Pitcher Partners in conjunction with Swinburne University revealed that 51% of business owners do not have a business succession plan in place.

An important part of any business succession planning is putting in place as early as possible an agreement between the business owners setting out an agreed process for what is to happen when one of the business owners wishes (or is forced) to exit the business and, importantly, what is to happen to that business owner’s interests in the business.

Can’t I give my interest in a business to someone else in my Will?

Business owners are in many instances able to bequeath or gift their business interests to someone of their choice under a Will.

However, this method of business succession has a number of pitfalls, the most significant of which is that it may well leave the surviving business owners in a business arrangement with a person or persons with whom they are not familiar and with whom they may not wish to have an ongoing business relationship.

For this reason it is important for businesses to have an agreed business succession plan in place. A commonly used way of achieving this is through the use of a Buy/Sell Agreement.

A Buy/Sell Agreement will take precedence over the Will because the deceased’s business interests will be transferred in accordance with the Buy/Sell Agreement and will not form part of the deceased’s estate.

What is a Buy/Sell Agreement?

A Buy/Sell Agreement is in effect part of a business succession plan. It is a contract that provides for the future payout or sale of a business owner’s interests to his or her business partner(s) on the happening of certain events. Typically these events include such things as the disablement or death of one of the business owners. A Buy/Sell Agreement will also often set out an agreed mechanism for the succession of one business owner’s interest in the business to the remaining owners of the business or to a third party.

Buy/Sell Agreements are also frequently linked to insurance policies which are put in place where a trigger event will (or is likely to) have a significant financial impact on the business.

If you own a business and you’re concerned about how the death, disablement or retirement of one of your business partners may have on the operation of your business, then a Buy/Sell Agreement can assist you. Not only does it allow you to purchase your business partner’s share if any of these things trigger events were to happen, but it can also help you avoid your ex-business partner’s spouse or children moving into your business.

However, business owners must seek competent accounting advice in relation to any capital gains tax implications before entering into a Buy/Sell Agreement.

Are all Buy/Sell Agreements the same?

Standard-form legal documents written with generic terms and conditions often do not take into account the particular circumstances in a given case and therefore risk being ineffective in the particular circumstances and are often unclear and confusing.

In particular, the risk with standard-form Buy/Sell Agreements is that the document:

1.will not be prepared for your particular  business with all of its unique circumstances and your specific needs; and

  1. may in the end be found to be legally unenforceable making the whole exercise a waste of time and money.

Therefore, it is advisable, and makes commercial sense,  to have a Buy/Sell Agreement prepared specifically for your personal and business circumstances by a lawyer experienced in preparing such documents.

What are the main advantages of having a Buy/Sell Agreement?

Buy/Sell Agreements:

  1. provide certainty for the business owners by reducing the risk of succession disputes;
  2. reduce the risk of the transfer of an outgoing owner’s interest in the business being undervalued with devastating financial consequences;
  3. reduce the risk of the business suffering significant financial loss , or even having to be wound up, because no agreed mechanism is in place to deal with business succession thereby resulting in all the business owners suffering financial harm.

There are many good reasons to have a current business succession plan in place for your business and to include a carefully and properly prepared Buy/Sell Agreement as part of that business succession plan.

PLEASE CONTACT

Contact Les Buchbinder at [email protected] if you wish to discuss this matter or your estate planning objectives further.

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The Will to Challenge

Modern life (and the complexities that come with it) mean that we must consider our estate planning very carefully.   With the increase in conflicting moral obligations to spouses, de factos, children, step children and other loved ones, even the most careful Willmaker may find that there is someone who feels that they should have received more.  Where a person dies without a Will, it is also a real possibility that someone may feel that the laws of intestacy do not leave them with adequate provision from the deceased’s estate. 

The aim of the Family Provision Act 1972 (WA) (the Act) is to make provision for the maintenance and support of the dependants of a deceased person where those dependants do not receive an adequate inheritance from the deceased’s Will (or by section 14 of the Administration Act 1903 (WA) if the person died without a Will). 

The following classes of people may apply to the Court for further provision:

  • a spouse or de facto partner;
  • a child;
  • a parent

and, in certain circumstances:

  • a grandchild;
  • a stepchild; or
  • a former spouse or former de facto partner.

The claim must be made within six months of a Grant of Probate or Letters of Administration being made by the Court.

The Court has a wide discretion to determine what is fair and adequate provision and will consider a number of factors, such as the claimant’s:

  • financial position;
  • lifestyle;
  • medical needs;
  • relationship with the deceased,

as well as other factors such as the:

  • needs of other beneficiaries;
  • size of the deceased’s estate; and
  • moral obligation to provide for the claimant.

The existence of the Act highlights the importance of ensuring that your Will is always valid and up to date in order to protect the rights of your beneficiaries.  It also highlights the importance of seeking advice from an experienced estate planning lawyer in order to ensure that all measures are taken to protect your estate from potential legal fees after your death – an ineffective Will can be expensive to your estate!

The existence of the Act also highlights the importance of seeking appropriate legal advice if you were a dependant of a deceased person and do not believe that you have received an adequate or fair share of their estate.

PLEASE CONTACT

Contact us at bbv@bbvlegal.com.au if you wish to discuss this matter further.

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What is the Net Asset Pool?

Following on from my colleague’s article “What Do You Mean It’s Not Mine?”, I have reflected upon one of the more basic, yet most important, question in family law property settlement – what makes up the net asset pool?

Simply stated, the net asset pool is all of the parties’ assets minus their liabilities.

That sounds simple enough, but what exactly is an asset, a liability, or a financial resource, is sometimes not so simple.

Identifying and Valuing the Net Asset Pool

The asset pool includes assets which are:

  • owned by either party prior to the marriage;
  • accumulated during the marriage; and
  • acquired post separation.

The Family Court can deal with an asset which is:

  • registered in the sole name of a party;
  • registered in joint names; and/or
  • registered in the name of a company or trust which a party controls or in which a party has an interest.

The Court also has regard to the financial resources of a party, such as any benefits which may flow to a party from a trust.

There are often disputes between parties as to:

  • the identity of assets;
  • the value of assets; and/or
  • assets which may have been dissipated either before or after separation.

The Court recognises the concept of an “add-back” or “notional property”.  This means that the Court can “add-back” into the net asset pool those assets which:

  • formed part of the asset pool but have been spent (for example, funds in a joint account spent on a party’s legal costs);
  • have been gifted to a third party;
  • have been recklessly wasted by one of the parties (for example, gambling or extravagant expenditure); and/or
  • have not been disclosed or are unaccounted for.

In determining the net asset pool, it is necessary to consider any contingent or latent tax liabilities which may arise upon the division or transfer of assets.  Transfers of assets between parties, pursuant to orders of the Family Court are normally exempt from stamp duty and parties can claim capital gains tax rollover relief.  However, where other assets are transferred, such as sale or transfer of shareholdings, or superannuation splits, different considerations may apply.  Parties should obtain independent financial or accounting advice in relation to these matters.

The relevant date for the determination of the net asset pool is the date when the Court hears the application.  If parties negotiate a settlement, the appropriate valuation date will be at the time of a settlement.  Many litigants do not appreciate that assets acquired pre-marriage or post separation can also be brought to account by the Court.

What is an Asset for the Purposes of Property Settlement?

Some of the more common assets are

  • real estate
  • motor vehicles
  • personal property (artwork, jewellery, furniture, antiques and personal possessions of value)
  • shareholdings in publicly listed or private companies
  • savings/deposits
  • superannuation (save and except in de facto property cases in Western Australia)

The following may also be deemed an asset of a relationship

  • goodwill of a business
  • interest in a partnership, franchise or other business
  • property held overseas or interstate
  • surrender value of a life insurance policy
  • patents and copyrights
  • antiques and artwork
  • lump sum redundancy/long service leave payments, provided they have already been received
  • lotto winnings or other windfalls (such as insurance payments and inheritances in certain circumstances)
  • contingent assets such as loan accounts in family trusts
  • vested interest in an estate, such as a life interest in property
  • frequent flyer points
  • water rights for rural properties
  • livestock

The assets taken into account by the Family Court include those owned by either party prior to the marriage, accumulated during the marriage or acquired post separation.

The Court also has regard to the resources of a party, which may include the following

  • benefits which may flow from family or discretionary trust or other entity
  • benefits received as a company director (company car, computer, phone)
  • inheritance shortly to be received
  • superannuation (in de facto property cases in Western Australia)

What is a Liability for the Purposes of Property Settlement?

Some of the more common liabilities are

  • mortgages
  • credit cards
  • personal loans (car loans and hire purchase leases)

The following may also be deemed a liability of the relationship

  • current outstanding taxation liabilities including income tax liabilities and capital gains tax
  • tax liabilities which may arise upon the division or transfer of assets
  • capital gains tax to be incurred from the sale of a property or shareholdings
  • outstanding land tax
  • HECS/Fee Help debt
  • monies owed to family entities

Ultimately what forms part of the net asset pool varies on a case by case basis.  A careful analysis of your financial position is prudent.  You may also need to speak with your accountant to help you prepare a schedule of your assets and liabilities.

PLEASE CONTACT

Contact us at bbv@bbvlegal.com.au if you wish to discuss this matter further.

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What Do You Mean It’s Not Mine?

With the increase in sophisticated financial plans and the heightened awareness of the benefits of asset protection strategies, what seems like a simple question actually requires careful consideration – what do you own?

This question is important when considering your estate planning objectives. Is it your vision for your children to take over the family business? Have you taken out life insurance to ensure that your spouse can pay the mortgage? Who will take control of your family trust after your death? When you own, or have an interest in, what are commonly referred to as ‘Non-Estate Assets’, additional planning is required.

An ‘Estate Asset’ is an asset owned personally in your name.  You may transfer ownership of Estate Assets in your Will to your preferred beneficiaries.  An Estate Asset includes any asset that you own solely in your personal name or (if with someone else) as a tenant in common.  Estate Assets can include real estate, personal belongings, shares, investments and/or cars.

If you do not own an asset in your personal capacity (i.e. in your name) then that asset is a ‘Non-Estate Asset’. Non-Estate Assets include:

  • assets owned with someone else as a joint tenant;
  • assets owned by a Trust;
  • superannuation or life insurance proceeds (subject to binding nominations and trustee discretion); and
  • assets owned by a company.

It is not possible to transfer ownership of a Non-Estate Asset by your Will as technically it is not yours to give away.  For example, company assets belong to all of the shareholders of a company, trust assets belong to all beneficiaries of that trust and superannuation does not automatically form part of your estate.

So, how do you deal with Non-Estate Assets and achieve your estate planning objectives? It is crucial to seek appropriate legal and financial advice with respect to succession of these entities and distribution of the relevant assets. Your lawyer and financial adviser will often work together with you in order to create a strategy to reach your goals and ensure that your legacy is passed on in accordance with your wishes.

PLEASE CONTACT

Contact us at bbv@bbvlegal.com.au if you wish to discuss this matter further.

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You Have Decided to Separate… Now What?

With the increase in sophisticated financial plans and the heightened awareness of the benefits of asset protection strategies, what seems like a simple question actually requires careful consideration – what do you own?

This question is important when considering your estate planning objectives. Is it your vision for your children to take over the family business? Have you taken out life insurance to ensure that your spouse can pay the mortgage? Who will take control of your family trust after your death? When you own, or have an interest in, what are commonly referred to as ‘Non-Estate Assets’, additional planning is required.

An ‘Estate Asset’ is an asset owned personally in your name.  You may transfer ownership of Estate Assets in your Will to your preferred beneficiaries.  An Estate Asset includes any asset that you own solely in your personal name or (if with someone else) as a tenant in common.  Estate Assets can include real estate, personal belongings, shares, investments and/or cars.

If you do not own an asset in your personal capacity (i.e. in your name) then that asset is a ‘Non-Estate Asset’. Non-Estate Assets include:

  • assets owned with someone else as a joint tenant;
  • assets owned by a Trust;
  • superannuation or life insurance proceeds (subject to binding nominations and trustee discretion); and
  • assets owned by a company.

It is not possible to transfer ownership of a Non-Estate Asset by your Will as technically it is not yours to give away.  For example, company assets belong to all of the shareholders of a company, trust assets belong to all beneficiaries of that trust and superannuation does not automatically form part of your estate.

So, how do you deal with Non-Estate Assets and achieve your estate planning objectives? It is crucial to seek appropriate legal and financial advice with respect to succession of these entities and distribution of the relevant assets. Your lawyer and financial adviser will often work together with you in order to create a strategy to reach your goals and ensure that your legacy is passed on in accordance with your wishes.

PLEASE CONTACT

Contact us at bbv@bbvlegal.com.au if you wish to discuss this matter further.

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Landlords – Back to Basics

The starting point for all Landlords should be ensuring that they have an appropriate and well drafted lease for their commercial premise. It is a crucial step for Landlords as a poor lease or a bad leasing decision can be a costly mistake. The lease is central to the goodwill, value and future sale of a business.  A well drafted lease can avoid or assist the Landlord in resolving disputes that they may have in the future with tenants.

In Western Australia, the Commercial Tenancy (Retail Shops) Agreements Act 1985regulates many retail shop leases. Landlords should understand their rights and obligations in relation to the lease and what procedures to follow in the event of any disputes.

In October 2015, the commercial leasing vacancy rate in the Perth CBD was 19.6%. This figure was expected to grow in early 2016 as final completions of new developments came onto the market and leasing space that was taken up during the boom, was handed back as businesses have downsized.

At its meeting today, the Reserve Bank of Australia’s Board decided to leave the cash rate unchanged at 2.0 per cent. The reasoning behind the decision was that recent information suggested the global economy is continuing to grow, though at a slightly lower pace than expected. This is the ninth month in a row that Australia’s official interest rate has remained unchanged at a record low 2 per cent.

The ramifications for Landlord’s entering into a bad or hastily drawn lease in this current climate is that they may find that they have an invalid lease or they may experience significant disputes and as well as potential litigation in later years as a result. When interest rates do start to rise in the coming years, we are likely to see a large number of disputes concerning rent reviews.

Legal and commercial advice should therefore be obtained before:

  • making any commitments to lease, take on an assignment or incur any other obligations;
  • signing an offer to lease or any other lease related document;
  • payment/receipt of any deposit or other monies; or
  • occupying the leased premises.

If you are a Landlord looking to lease in this competitive market, you should begin by considering your leasing requirements with the main goal to develop a profitable business. Once you have identified your leasing requirements (i.e. the lease term, annual rent, rent reviews, etc) you must then seek to include as many of these requirements as possible when negotiating the terms of a new lease or the renewal of a lease with the tenant.

PLEASE CONTACT

Contact Les Buchbinder at [email protected] if you wish to discuss this matter or your estate planning objectives further.

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My Will is My Business – the Essential Connection

We are constantly reminded of the importance of having a Will. The reality is, no adult is too young to make a Will and we must all confront our reluctance to plan for our succession.  Whilst the majority of us want to ensure that we provide security to our loved ones and our own legacy, many people never get around to actually doing anything about it.

So, what happens if you never execute a Will? Well, there are risks…

The most obvious risk is the complete loss of control of the distribution of your estate. If you die intestate, your estate is distributed in accordance with State Government Legislation. This means that your wishes or intentions have no relevance – the laws of intestacy dictate who gets your estate. Not only do you not have a say in who receives your estate, but you also lose control of imposing terms and conditions, such as age restrictions for beneficiaries to control their inheritance, implementing testamentary or special disability trusts or considering a fair and reasonable distribution between beneficiaries.  This gap between what the law says and what you might have wanted for your beneficiaries may quite possibly result in disharmony between beneficiaries and hardship for your administrator, as they try to navigate through administering an intestate estate.

Without giving thought to your estate planning, you also do not have a chance to properly consider binding death benefit nominations for your superannuation, Enduring Powers of Attorney for your financial affairs or Enduring Powers of Guardianship for your health and lifestyle needs.

Beyond considering your personal estate is the need to consider any assets that your business entities may own.  There is a wide misunderstanding about who owns assets that form part of any business entity.   If you operate as a sole trader, your business assets are your personal assets and accordingly do form part of your estate. On the other hand, assets owned by (for example) a trust or company belong to those separate legal entities and not to you personally.

The question then is, how do you ensure that your loved ones benefit from your business assets? Those persons in control of your business entity decide how the assets are dealt with.  It is therefore important to pass control of these entities to the right people, so that your intended beneficiaries eventually do receive the benefit of those assets.  This entails giving careful consideration to such mechanisms as gifting shares in a company or giving units in a unit trust to your intended beneficiary, or appointing that beneficiary as the successive appointor of your family trust.  If you die intestate and do not take the opportunity to give thought to whom or how you will pass control of these entities, you may leave your business (and possibly your family’s source of income) floundering.

As a shareholder of a company with multiple shareholders, it is vital to remember that if one of your fellow shareholders passes away and the shareholders haven’t addressed a succession plan for the company, then you could end up being in business with whomever inherits the deceased’s shares.  This may be his or her spouse, children or even someone entirely different. This can lead to significant disharmony and in turn could also lead to the company suffering financial loss and other prejudice because of a lack of proper management.  By implementing a business succession agreement (and the right insurances if necessary) or a shareholders agreement, one is able to ensure that they know exactly who they will be doing business with in the future and ensure the positive ongoing operation of the company and its officers.

It is quite clear – estate planning goes hand in hand with good business planning!

PLEASE CONTACT

Contact us at bbv@bbvlegal.com.au if you wish to discuss this matter further.

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