Who will take over?

One-third of Australian family business leaders do not know who is going to take over the business when they retire. And a study also has revealed that more than a quarter of them do not have an exit strategy in place.

The findings, part of a joint Family Business Australia and KPMG study, show that succession planning continues to be one of the biggest issues facing business. The survey, conducted with Deakin University in Victoria, also found that the present generation at the helm of the family business was not talking enough to the next generation who were expected to take over.

The responses indicated that succession planning continued to be seen as too difficult. The Survey of Family Business Needs 2005 found that while many baby boomers had firm retirement plans, they had not made significant plans for the future of their businesses.

Family Business Australia chief executive officer Philippa Taylor says despite 57% of those surveyed saying they planned to retire in the next decade, almost seven in 10 had not chosen a successor.

"It is intriguing that, despite the amount of attention retiring baby boomers and the ageing population receive in Australia, 34% of family businesses polled had no formal succession plan and 27% were undecided about their exit strategy." Taylor says only 1.5% of those polled planned to close their business when they retired.
 
KPMG manager, middle market advisory, Graeme Matthews says family businesses are ignoring succession planning at their own peril. "Finding a willing and able successor is the third-highest issue for business owners, according to the survey. However, the numbers also illustrate that these concerns aren't being acted on." Matthews says the perception that succession planning was too difficult needed to be rectified.
 
"Well-executed succession planning creates an environment which ensures that the best resources are available and get selected to lead the business into the future." He adds: "Ineffective succession planning results in family disharmony, destroys value and could ultimately lead to the family losing both control and ownership.

"A proper succession plan would include the current business owner's personal needs and objectives and those of family members – including what ownership and control is desired in the future and how best to achieve it."

There are sizeable assets at risk. More than 30% of businesses had a turnover of between A$1 million and A$5 million a year. About 16% of business owners say they would sell their business, while another 27% were undecided.

"It's conceivable that a large proportion of the undecided group may sell either by trade sale, or for a tiny number, through a stock exchange float," says Matthews.

Individuals who own a business will often face a huge capital gain when they sell it, according to Carly O'Keefe, technical manager at Tower Life. "But there is a raft of small business capital gains tax concessions that can be used to minimise or eliminate capital gains tax when they do sell."

Capital gains tax applies to any asset purchased after September 18, 1985. If the asset being sold has been owned for 12 months, an individual only gets taxed on half the gain, or 24.25% for someone on the highest marginal rate.

Consideration of small business CGT concessions comes next. They include:

- A 15-year asset exemption.
- 50% active asset reduction.
- retirement exemption.
- Rollover relief.

A business owner must satisfy basic tests before they qualify. The first is the maximum net asset value test which says a business owner and related entities can't have net assets of more than A$5 million when an asset is sold.

Net assets is the market value of assets less liabilities. (Exemptions to assets counted include the family home, superannuation and life insurance policies.)

The second test is that the asset being sold must meet the "active asset test", that is, be ready for use in the business. Examples include goodwill, the business premises, intellectual property, and shares or trust interests in set circumstances.

The asset must have been "active" for at least half the period of ownership. O'Keefe notes that once an individual meets basic tests, then it's time to match them with a concession for which they qualify.