Preparing for intergenerational change in family businesses

Accountants and advisors play a crucial role in guiding business owners through the complexities of this process, ensuring both compliance and optimisation of financial outcomes. This article delves into the key tax and advisory services that are essential for preparing for intergenerational change in Australian privately owned businesses.

1. Business valuation and tax implications

A critical first step in preparing for intergenerational change is determining the value of the business. Accurate valuation is essential for a variety of reasons, including setting a fair price for the transfer of ownership and understanding the tax consequences. Accountants can assist with:

• Valuation methods: Applying appropriate methods, such as discounted cash flow, asset-based valuation, or market comparison, to determine the fair market value.
• Capital Gains Tax (CGT): Understanding the potential CGT implications for the exiting owners. In Australia, the sale or transfer of business assets can trigger CGT, and there may be opportunities to minimise this tax through the application of small business CGT concessions, rollover relief, or other strategies.

2. Structuring the transition

The structure of the business transition can significantly affect tax outcomes. There are several options, including:

• Direct sale or gift: Transferring ownership through a sale or gift can have different tax implications. A sale might trigger CGT, while a gift could involve considerations around the deemed market value and potential CGT liabilities.
• Use of trusts: Trusts can be an effective vehicle for managing intergenerational change, offering benefits such as asset protection, tax planning, and income distribution flexibility. Advisors can help set up family trusts, unit trusts, or discretionary trusts, ensuring they are structured in a tax-efficient manner.
• Employee share schemes and buyouts: For businesses transitioning to key employees rather than family members, options like employee share schemes or management buyouts can be considered. These arrangements must be carefully structured to comply with tax laws and optimise outcomes for all parties involved.

3. Tax optimisation and compliance

Navigating the tax landscape is crucial during the transition process. Key areas include:

• Income tax planning: Optimising the timing and structure of transactions to manage income tax liabilities. This might involve considering the use of pre-sale dividends, salary packaging, or other tax planning strategies.
• Goods and Services Tax (GST): Ensuring compliance with GST obligations, particularly if the transfer of business assets is involved. Certain transactions may be GST-free, such as the sale of a going concern, and advisors can help determine eligibility.
• Succession and estate planning: Integrating business succession with personal estate planning is essential to ensure that the owner's broader wealth and asset distribution goals are met. This includes planning for potential death or incapacitation, which may involve setting up enduring powers of attorney, company powers of attorney, updating wills, and creating testamentary trusts.

4. Advisory services for business continuity

Advisors play a vital role in ensuring the continued success of the business during and after the transition. Key advisory services include:

• Strategic planning: Assisting the new leadership team with strategic planning to ensure a smooth transition. This might involve reviewing the business model, identifying growth opportunities, and setting long-term goals.
• Risk management: Helping the business identify and mitigate potential risks associated with the transition. This can include advising on insurance coverage, reviewing contracts, and ensuring compliance with regulatory requirements.
• Financial management: Providing ongoing support in areas such as budgeting, cash flow management, and financial reporting. Effective financial management is critical to maintaining stability during the transition period.

5. Managing family dynamics and governance

In family-owned businesses, managing family dynamics is often a key challenge. Advisors can provide:

• Family governance structures: Establishing governance structures, such as family councils or boards, to facilitate decision-making and address potential conflicts. These structures can help separate family and business issues, ensuring decisions are made in the best interests of the business.
• Communication and mediation: Facilitating open communication among family members and, if necessary, providing mediation services to resolve disputes. Clear communication is vital to prevent misunderstandings and ensure everyone is aligned with the succession plan.

The transition of a privately owned business to the next generation is a complex process that requires careful planning and expert advice. By addressing key tax and advisory considerations, business owners can navigate this transition smoothly, optimise financial outcomes, and ensure the continued success of the business.

Accountants and advisors play a critical role in guiding clients through the intricacies of intergenerational change, from valuation and tax planning to governance and strategic planning. With the right support, business owners can preserve their legacy and set the stage for future generations to thrive.

If you need assistance with preparing for intergenerational change within your business, please contact your usual Forvis Mazars advisor or our business advisory experts via the form below or on:

Date published:12/09/2024

Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.

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