According to the Australian Bureau of Statistics report: Characteristics of Small Business Operators, there are 1.6 million small business operators in Australia and of these, more than one third are aged over 501. This means that more than half a million small business owners could retire before 2025.

For some, the family business will become a legacy and be handed down to the next generation, but one leading Australian succession planner believes that more than half of all small business owners in Australia plan to use their business as the primary source of funding for their retirement².

This means the business must be sold, but who will buy it? Is there a group of competent employees to take over through a management buyout, or does it have to be sold to strangers or even business competitors? And how can the company be internally structured to maximise proceeds from the sale while minimising taxes?

Australian Tax Office research shows that around 60 per cent of businesses do not have a succession plan in place³, so while many small business owners will have thought about this issue, others may be deferring key decisions until it is almost too late to make the most of what is usually a once-in-a-lifetime opportunity.

Step 1: The succession plan

The first step is usually to decide what your preferred succession option is – hand the business down within the family, sell to

current partners and senior employees, or sell to a third party? Each of these choices then leads to more options.

Even a “simple” solution such as handing the company on to the next generation may raise issues of who is going to take over, and whether or not siblings who do not actively run the business will share in the profits.

A management buyout or sale to a third party will also raise issues – will payment be made in cash, for example, or partly financed by the seller? Will the founder remain involved in the business as a board director or minor shareholder? Will the final payout be dependent on future performance?

Finally, two critical questions: how can the proceeds be maximised to boost the owner’s superannuation, and how can capital gains tax be minimised for the retiring owner?

Step 2: Tax-effective succession

Capital gains tax concessions for small businesses are significant, and can include exemptions on the sale of businesses

owned for more than 15 years, a 50 per cent reduction on the sale of current business assets, an exemption in the case of the

sale of assets prior to retirement or a small business roll-over option subject to meeting certain conditions4. However, it is essential to structure the business to maximise these concessions. For example, if the company is less than 15 years old, should the primary value be allocated to the shares in the business or the assets it owns? These are issues for your accountant to advise you on.

Superannuation is an attractive destination for the proceeds from selling a business, since the seller may be exempt from the

standard non-concessional contributions cap and contribute amounts up to the capital gains tax lifetime cap of $1.205 million from certain sale proceeds, or CGT-exempt funds up to $500,000, directly into a super fund5.

Finally, if the seller of the company has a self-managed superannuation fund (SMSF), it may be possible for the SMSF to

purchase the business premises from the company. This means that you may have an opportunity to retain business real estate in your superannuation portfolio free of capital gains tax, yet remain free to sell the goodwill, turnover and other assets of the business⁶.

Effective teamwork essential

Small businesses come in all shapes and sizes, from one- or two-person consultancies to larger companies employing many people, but whatever the size of your business, you usually need specialists on your side to achieve a successful succession plan – a business accountant, your financial planner or a solicitor.

Your accountant or succession planner will assist in valuing the company and advise you on an asset structure that will maximise available tax concessions. Your financial planner, together with your accountant, can develop strategies to manage the transfer of the capital gain into superannuation, helping you to set up an SMSF if this option suits your needs, and advise on the options for converting all or part of your super into a tax effective retirement income.

If you own a small business and you do not yet have a detailed succession plan in place, don’t wait until it is too late. Talk with your accountant and financial adviser now, or better still, make it a three-way conversation.

1 http://www.abs.gov.au/ausstats/abs@.nsf/mf/8127.0
2 http://www.successionplus.com.au
3 http://www.successionplus.com.au/
4 ATO.
5 ibid.
6 http://cpaaccountants.com.au/Business_Capital_Gains_Tax__Pitfalls__Possibilities.htm