Malaga bus assoc succession planning

KPMG Private EnterpriseKPMG Private Enterprise

2© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

KPMG Private Enterprise

KPMG Private Enterprise

National, Perth and Karratha

50 people in Perth office, 500 Australia wide

The KPMG myth – not just the big end of town

Small and medium size business

Privately controlled groups, family business, not-for-profits

Tax, accounting, superannuation, migration and business advice

Strategy, corporate governance, business structure, succession planning

Planning for a Generational Transition orDesired Business Exit

May 2015

4© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International.

Today’s Presentation

1. Introduction

2. Understanding the process of transitions and exits

3. Why it is important to transition the equity of a family business ahead of the estate plan

4. The pitfalls and critical issues: tax, funding and achieving consensus between generations


1. Introduction

Why is this so important?


Family business in Australia – strengths

70% of all companies 60% of GDP 60% of the workforce Across all industry sectors Iconic companies have been – and remain –

family operated and owned.

Contribution and importance to the economy

Achieving a balance

The inherent strengths and competitive advantage


The challenges of family business - challenges

■ Conflicting goals / values

■ Conflicting personalities

■ Expectations

■ Work ethic

■ Employment of family members

■ Compensation

■ Reluctance to plan

■ The element of time

“In general, the family component of a family business becomes more difficult to manage as the business moves from one generation to the next.

Therefore, learning and preparing for how to manage the family component early on in the evolution of the family business will pay dividends down the road.”

* Participant in KPMG / Family Business Australia Family Business Survey.


While the majority of family business owners would like to see their business transferred to the next generation, it is estimated that 70% will not survive into the 2nd generation and 90% will not make it to the 3rd generation.

Family Firm Institute

www.ffi.org


2.

UNDERSTANDING the PROCESS of

EQUITY TRANSITION:

enhancing facilitation and communication

2. UNDERSTANDING the PROCESS ofTRANSITIONS andEXITS


Change is happening – the predictable family business issues

Events

Complexity

Needs & expectations

grow

professionalise

regenerate or lose relevance???

Owner / founder

Sibling partnerships

Cousin consortiums

Growing

divorce

unresolved differences in the family

liquidity – family expectations vs business needs

family member causing tension in the business

Family member needs a job

‘Kevin is he oldest so he’ll take over the business’

disagreements – re: future direction of the business

death of the founder/current generation

business downturn

Family member out of their depth

family member wants to sell

Financial security of the parents.


Change is happening – the predictable concerns of each generation

Time / Generational change

Owner / founder (1st gen)

Sibling partnerships (2nd gen)

Cousin consortiums (3rd gen)

Concerns

Management issues

Shareholder issues

• Leadership transition

• Succession

• Estate planning

• Growth

• Survival

• Maintaining family ownership

• Teamwork

• Succession

• Professional management

• Re-vitalising strategy

• Allocation of capital

• Shareholder liquidity

• Family culture and vision

• Conflict resolution

• Allocation of resources

• Leadership succession

• Shareholder relations


Family in the Family Business


1. Family only

2. Family member working in the

business.

3. Family member who owns and works

in the business.

4. Family member who has ownership

but not working in the business

5. An owner who is not a family member.

6. An owner who is not a family member

and works in the business.

7. A non-family member employed in the

business.

1

2

3

4

5

6

7

Roles in a family business


The impact of the family component


What we hear

The family

The owner/s The

business

“I want my children and their families to be happy and respect each other.”

“Things should be equal”

“Is my family’s wealth and interests protected?”

“My children should be able to join the family business.”

“What happens if I don’t want to join the business?”

“I’d like a regular income from the business”

“Who gets control?”

“Where is the business headed?”

“Is my equity safe…I’d like a regular

dividend.” “Can I sell…how does that work”

“We need the best person for the job”

“Can I join the business?”

“How does my share transition to my family?

“I want to step away from the business but the next generation aren’t ready.”

“I would like to see the business as a legacy but I am not sure the family have the same interest as me….it’s different now”.

“If I transition the business how are my interests protected?”

“I’m not confident in the family’s ability…we need the best person for the job.”

“We need to re-invest in the business.”

“What am I working towards?.....how do I secure my financial security outside the business?”

“I have my own aspirations and timeframe.”

“Its not clear what happens if Dad/Mum dies”

“We need a clear direction….we need to professionalise”.

“The business needs to re-invent itself” “I am running the business but dad/mum make all the decisions”


Private / family business – stages to exit

Structuring financial affairs to protect growth and distribute wealth

Actively manage business & commercial risks and opportunities

Governance seeks to ensure that the family & business strategic goals are aligned and good management is achieved

Planning for the orderly transfer of ownership & management

Proactively plan for a strategic exit maximising shareholder value and optimising the shareholder's tax profile

Strategic/business planning for growth, improving business efficiency, strategy & direction

Business & Family Governance

Strategy & Profitability

Succession Planning

Risk Management & Compliance

Managing & Preserving Wealth

Exit Strategies

Professionalising the

private or family

business


Family business succession planningManaging the family component


2.

GETTING IT ON THE AGENDA:

Why it is important to transition

the equity of a business

ahead of the estate plan

3.WHY IT IS IMPORTANT to TRANSITION EQUITY AHEAD of the ESTATE PLAN


“ Inadequate estate planning and failure to properly prepare and provide for the transition to the next generation, coupled with the lack of funds to pay stamp duty and capital gains, were among the leading causes for the failure of family owned businesses…

In 47.7%, the transition and ultimate collapse of the firm was precipitated by the founder’s death”.

(University of Connecticut Family Business

Program Website)


Problems with Succession via Estate

Practical issues:

Outdated Will

Contested Will, deferred probate

No certainty of ownership for successors

Non-estate assets and structure issues:Discretionary trusts – lack of succession clauses


Problems with Succession via Estate, cont’d.

• Practical issues, cont’d:

Date of death is unknown, cannot plan

No ability to do tax planning: CGT retirement exemptions, superannuation Pre CGT assets

Transfer of relationship with customers

Funding pressures to pay out on (SHA) valuation



People issues:

Will cannot deal with the wider implications –

(a Will deals with ownership not management)

No opportunity for consultative appointment

Unprepared manager / successor

Family legacy / personal guilt issues

Sibling rivalry and entitlement issues



What about the bank?

• Personal guarantees

• Bank covenants

• Cross collateralised assets (of the deceased)



Opportunities forgone

• Other exit strategies: – MBI– MBO– Trade sale– IPO

• Train several successors and choose the best (ahead of ownership transfer)


4.

DISCUSSING THE PITFALLS

AND CRITICAL ISSUES:

tax, funding,

consensus between generations

4.THE PITFALLS and CRITICAL ISSUES:tax, funding, andconsensus between generations


The Pitfalls: Tax

Transfer of an asset is a CGT event• May be able to utilise CGT discounts/exemptions• May trigger “resettlement” in a discretionary trust

May be subject to indirect taxesGSTDuties

May require restructure

http://www.google.com.au/imgres?imgurl=http://yourbusinesssuccession.com/blog/uploaded/iStock_000005989308XSmall.jpg&imgrefurl=http://yourbusinesssuccession.com/blog/tag/business-succession-planning/&usg=__drulAWBPHnPbvzqNeigoMiMpe1g=&h=346&w=347&sz=58&hl=en&start=8&zoom=1&tbnid=4LY2a5HARqUAuM:&tbnh=150&tbnw=134&ei=hwl7Tdu5BsHtOaPw_ZgH&prev=/images?q=succession+planning&um=1&hl=en&sa=N&biw=1080&bih=467&tbs=isch:1&um=1&itbs=1&iact=rc&dur=430&oei=GQl7TZbKKc_wsga2v7HuBg&page=2&ndsp=10&ved=1t:429,r:6,s:8&tx=85&ty=103


The Pitfalls: Tax, cont’d.

Company losses subject to rules:• Continuity of Ownership Test• Continuity of Business Test

Trust losses & trust loss elections

Division 7A ITAA – related party loans• Repaying of loans from exiting owners can cripple new owners• Repaying of loans by exiting owners can greatly reduce proceeds• Repayments may need funding before exit

TAX HAS TO BE FUNDED!

http://www.google.com.au/imgres?imgurl=http://www.eliteopi.co.uk/images/exit-strategy.jpg&imgrefurl=http://www.eliteopi.co.uk/exit-strategy.php&usg=__9DeiOc63jnhl8pwUdgmvgzrJw4U=&h=237&w=496&sz=41&hl=en&start=9&zoom=1&tbnid=6eTrLIBUGcSaWM:&tbnh=62&tbnw=130&ei=Zkh8TeHbAZDuvQOflaTSBw&prev=/images?q=exit+strategies&hl=en&sa=G&biw=1225&bih=551&gbv=2&tbs=isch:1&itbs=1


The Pitfalls: Funding

Valuation – how much?• Methods & reliable basis• Early preparation of business is critical to extract highest

value • Expectations of exiting owners v’s market• View of the bank on value may be different


The Pitfalls: Funding, cont’d.

Planning for the unforseen• Death• Disability• Divorce

Insurance funding• Valuation for insurance


The Pitfalls: Funding, cont’d.

Funding needs a PLAN• Cash-flow planning is paramount

Considerations• Time frame and composition of payment(s)• Which entity is the buyer?• Will external funding be required?

– Is it accessible by the buyer?– What do the financials look like?


The Pitfalls: Reaching Consensus

Who will be taking the lead

Understanding the emotions and providing comfort

Communication and decision making amongst family members

• Family business meetings (active family members)• Family Council meetings (all family included)• Family business rules (constitution)


The Pitfalls: Conflict Management

Need family and, or business governance


The Pitfalls: Reaching Consensus & Family Governance

Structures and processes to manage the family interaction with the business and to professionalise the business.

• Vision, Mission, Values

• Family Constitutions / Pre-agreed rules

• Shareholders or Unit holders Agreement

• Board of Directors and, or Advisers

• Plan for the orderly transition of Management, Income, Control and Equity of the business.

• Provides future generations with support to thrive in the family business.

Family business

governance

Succession planning

Governance helps to achieve successful transition

Questions?

Family Transition or

Business Exitis a Process

© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).

Disclaimer

© 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

KPMG and the KPMG logo are registered trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation. 36

About the presenter:Agnes VaccaKPMG Private Enterprise, Partner

Qualifications and professional associations Fellow, Australian Institute of Chartered Accountants Bachelor of Business (Acc), Graduate Diploma, Financial Planning, ASIA Registered Tax Agent

Agnes Vacca has over 20 years experience in providing advisory and compliance services to privately owned enterprises in Western Australia. Agnes works with business owners their finance teams and managers to develop and implement goal focussed business strategies including finance process improvement, cash-flow forecasting, budgeting, sensitivity analysis, business planning and finance proposals. Agnes specialises in family business succession, transition and exit readiness advice, working with owners to achieve their succession objectives. Working with small and large privately owned companies, trusts and partnerships involving one or more family groups, Agnes provides advice to enable an orderly business transfer whilst maximising the value to the owners. Agnes also provides advice to business owners regarding asset protection and estate planning.

In the area of compliance Agnes provides a wide range of accounting services including the preparation of financial statements to meet statutory requirements and financier required financial reports as well as reports for owners and managers. Agnes also provides taxation advice, structuring and strategies as well as preparation of taxation returns for income and indirect taxes to meet statutory obligations. Agnes also looks after the Australian compliance obligations for a number of Australian subsidiaries and branches of foreign companies.

Privately owned clients which Agnes worked with in an advisory capacity include businesses operating the manufacturing, retail, recruitment, legal, engineering and other professional services, telecommunications, transport, property, architectural, medical and hospitality industries and including high net worth individuals.

Agnes also holds the following positions:• Director and Company Secretary, Radio Lollipop (Australia) Ltd• Member, Zonta Club of Perth (past Board member)• 2012 WA Business News 40Under40 Winner

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