Succession planning can avoid sudden crisis

In 2007 a car accident took the life of a business partner of Mark Love and his colleagues. This was not only a tragedy but also potentially devastating for their business.

The director of Bradley Allen Love business and corporation section, Mr Love said a shareholders’ agreement was already in place as part of a succession plan. This plan, backed with insurances, enabled the deceased’s widow to receive the value of the business owed to her late spouse, but also:

“We had insurance to put money into the coffers of the business to cover that immediate jolt of loss of revenue,” Mr Love said.

Adding to the personal and emotional trauma of losing someone close, the remaining partners faced substantial and practical hardships.

In this case, three continuing partners had the full capacity, rights and authority to manage the business, yet that may not have been so where the trauma resulted in mental incapacity or if the business didn’t have “size”.

In a business that comprises of say, two families, or a single owner-operator, without a succession plan, the circumstances can be dire.

Mr Love and his colleagues will be addressing the need for succession planning in small business at BAL Lawyers’ next Breakfast Club meeting on November 9.

Mr Love says in the case of a two- family business model, the level of trust needed for succession may not be there.

“We have seen key disputes occur again and again because one side of the equation never regarded themselves as being in business with the spouse of the other. The trust and the like isn’t there,” he said.

“I think the solution in those circumstances is a shareholders’ agreement, or unit holders’ agreement or a partnership agreement that actually deals with how the value of the business is going to be addressed and how the management of the business is going to be addressed into the future,” Mr Love said.

“So it works not dissimilarly to a power of attorney. Power of attorney is much more a document about managing personal estates, personal affairs, rather than being something that could impose on your business partners someone with whom they had never really contemplated going into business. The power of attorney comes into its own, where a person remains alive, simply to get the documents signed – but that comes with personal duties that can be difficult to balance.”

Mr Love said people in small businesses do not give enough attention to succession planning, particularly in cases of trauma.

As a business owner, you should ask, “who is going to step in to fulfil the role that you fill every day, if for whatever reason you are unable to perform in that role?”

Who is going to replace the value of the goodwill that is lost to your business if you are unable to perform in it?

How are you going to meet the costs of that business if it isn’t able to perform when you are not able to perform?

Mr Love said succession planning was essential. “You need to find someone to hold the reins while you are unable to attend the business. It can be by power of attorney, or someone appointed into that position of management to be an officer of the organisation, that is the ultimate goal,” he said.

Small businesses typically are where the owners are hands-on in the operation and management of it. They tend to be run within a corporate structure.

In a succession plan, the role you want someone to perform can be less than a director of a company. They could be general manager, yet you still have to look carefully at the role you want this person to perform.

“There would be two different considerations,” Mr Love said. “If you are hands on in a business and you are its manager, you need a clear path of succession planning for a situation that might occur, whether you are being knocked off your pushbike and you are out of action for two months or longer.”

“Or you are a director of a company and unable to perform in the role of a director. Two different considerations would go into those changes,” he said.

A power of attorney tends to allow a person to become the other person’s legal personality, to create a fiction that one person can act as if they are the other person.

“A commonsense checklist when appointing a power of attorney, when you look at what the court might order, a person to become a personal representative of another person, for instance when someone is rendered mentally not capable anymore. The court is going to prefer someone who is a close family member, but that is not always going to be enough,” Mr Love said.

“They have to be capable and competent themselves, someone the first person has trust in and they have to exercise judgment in the manner according to the things that that person’s values and judgments accords with,” Mr Love said.

He said the decisions an appointed person makes must be sympathetic to the kind of ethics, morality and financial risk that the first person would have taken for themselves in the circumstances.

“Overwhelmingly your appointee must be someone who knows the responsibility to put the interests of the first person above their own, and that can be difficult because temptation is a powerful force,” Mr Love said.

For a small business single-operator looking to appoint someone to take over their business, they are typically a busy person themselves. So any such appointment is unlikely to be a long-term solution to the problem, rather it is more a stop-gap measure.

Depending on the circumstances of someone becoming active under their power of attorney, if it is because of a permanent disability, the stop-gap is trying to salvage what they can out of the business, whether they can hold it together long enough to achieve a sale as a going concern or simply execute an orderly winding down of affairs.

Mr Love said these are the sorts of choices that are going to be imposed on that power of attorney in circumstances when they have their own personal time and commitment to address. “A person in that position is not required to sacrifice their own resources in favour of the first person,” he said.

Mr Love said a power of attorney would be an unusual tool in circumstances to provide for a complete succession; it is a measure to get things signed whilst a greater plan unfolds. In many respects the succession plan (where there aren’t co-owners) would be to have your most senior employee in a role where they become the general manager of a business. They then occupy that role according to slightly lower legal duties than that a power of attorney or “director” would suffer from.

A power of attorney’s duties are the highest duties imposed by law, it is really the most duty of care to act in a person’s interests so you would typically find succession planning housed more in contractual documents, Mr Love said.

“You really should aim for more formal documents that would say to your good friend, or your good business colleague, your accountant, or somebody who might be an insolvency practitioner who would be an ideal person to professionally operate in that space, something that says, ‘If I get hit by a bus I want you to step in and perform this and this is the basis upon which I will pay you and these are the objectives that I would hope you would achieve in these circumstances’.” Mr Love said.

“It might fall well short of being a power of attorney but the document should convey the level of control and authority to allow that person to salvage what they can out of that business or keep it alive for the time being.”

Small business owners should think of all the things that can draw their energy away from the enormous amount of energy it takes to run their business.

“You just need a dreadful case of the flu. It can sap your energy and enthusiasm for literally months,” Mr Love said. Consider: “How is this business going to function without you?”

While small business offers wonderful autonomy and enjoyment of building something that is unique and you are not beholden to anyone, that all comes with risk.

The BAL Lawyers’ next Breakfast Club meeting is on November 9. Held at BAL Lawyers, Level 9, Canberra House, 40 Marcus Clarke Street in the city, the breakfast meeting begins at 8 am and concludes at 8:45 am.

The breakfast club enables participants to learn and share insights with one another. If you would like to attend, reply to events@ballawyers.com.au. There are limited spaces available, so the ‘first in, first served’ rule is applied.

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