Succession planning is a critical process for mining and resources business owners. As founders and owners look to step back from day-to-day operations, ensuring a smooth transition is not only paramount for the longevity and success of the business, but for all stakeholders involved.
In the coming weeks, my expert collaborators Financial Adviser James Marshall and Lawyer Craig Hong will explore the key issues business owners need to consider when planning for business succession. We’ll delve into the complexities of this process and highlight the benefits of taking a long-term strategic approach to business succession, which can provide advantages for everyone involved.
The decision between internal and external succession carries significant implications for the business’s future, involving various financial, operational, and cultural considerations. This article explores key points that business owners should consider when deciding between internal and external succession options.
Is Your Business Succession Ready?
Before delving into succession options, it’s essential to evaluate your mining and resources business’s readiness for succession. Ask yourself, is the current business structure appropriate for supporting a smooth transition? This involves reviewing tax, legal, and operational structures to ensure they facilitate succession or acquisition.
Additionally, it is important to ensure that your internal processes are robust, as efficient processes are crucial for maintaining business continuity during the transition. Another consideration is whether the business is overly reliant on a few key personnel or the founder. A dependency on key staff can pose risks during succession, making it necessary to have a broader base of capable employees. Similarly, diversification of the client base is important; reliance on a few key clients or referrers can impact the business’s stability during the transition.
Internal Succession: Preparing Future Leaders
Internal succession involves promoting current employees or family members working in your business to leadership positions. It is crucial that potential successors are genuinely interested in the leadership roles. Engage in open discussions to confirm their commitment. Assess whether these candidates have the necessary skills and experience to lead the business, possibly involving a trial period where candidates are given leadership responsibilities to gauge their performance.
From a financial perspective, consider whether the internal candidates have the financial means to buy into the business. If not, options like vendor finance or Employee Share Ownership Plans (ESOPs) can be explored. Vendor finance might involve simple Employee Share Schemes (ESS) for small to medium enterprises (SMEs).
Furthermore, determine whether internal candidates should receive a discount on their buy-in to reflect their contributions to the business. Implement safeguards to protect the business in case the succession plan does not work out as intended.
External Succession: Bringing in New Expertise
External succession involves bringing in new talent from outside your mining and resources business, potentially infusing fresh perspectives and skills. However, this option also presents challenges. Evaluating the capability of external candidates and understanding what attracted them to your mining and resources business is essential. This assessment should cover their skills, experience, and potential to contribute to the business’s growth. Ensuring that external candidates have the necessary capital to buy into the business is another critical factor. Financial readiness plays a significant role in external succession.
Cultural fit is another vital consideration; assessing whether external candidates align with the company culture is crucial for maintaining a cohesive work environment. The impact of external succession on internal candidates should also be considered. Addressing potential feelings of being overlooked and managing these dynamics helps maintain morale and productivity. Determining whether external candidates are expected to pay a premium to buy into the business and conducting an independent valuation can provide clarity and fairness in setting the purchase price.
Similar to internal succession, providing trial opportunities for external candidates to take on leadership roles in specific business segments can be beneficial. This allows the business to evaluate their capability for broader responsibilities. Implementing safeguards, such as buy-back clauses or phased transition periods, protects the business if the external succession plan doesn’t succeed.
Transitioning to Family: A Delicate Dance
Passing your mining and resources business to family members is a sensitive task that involves more than just signing over the title. It’s a complicated dance of managing family dynamics and ensuring fairness in the distribution of roles and benefits. This process also comes with legal and tax challenges. For example, giving your business or assets to family could lead to significant tax costs, like Capital Gains Tax.
Navigating Tax Implications
Australian tax regulations play a significant role in business succession planning. Key tax considerations for both internal and external succession include Capital Gains Tax (CGT), Employee Share Schemes (ESS), and stamp duty and other taxes. Transferring ownership can trigger CGT, and small business CGT concessions might be available to reduce this burden.
For internal succession, ESS can be a tax-effective way to transfer ownership to employees. Ensure compliance with tax regulations to maximise benefits.. Additionally, consider how the succession plan aligns with retirement strategies and maximising superannuation savings.
Combining Internal and External Succession
In some cases, mining and resources businesses may be in a position where they are considering a combination of internal and external succession. This approach leverages the strengths of both options but requires careful management to address potential complications, such as cultural fit and mutual respect between internal and external candidates. Clear communication and a well-defined integration plan are essential for success.
Business Valuation
Understanding your business’s worth is critical for succession planning. This involves a detailed and realistic assessment of the company’s financial health, market position, and future prospects. An independent professional valuation provides a solid foundation for negotiating the terms of a sale or transfer, whether to internal or external candidates. This process also helps in identifying any areas that need improvement to maximise the business’s value before succession.
Business succession can be a complex process, so be prepared!
Effective business succession planning in the mining and resources sector requires a thorough understanding of both internal and external options, along with careful consideration of tax implications and strategic objectives. By preparing well in advance and seeking professional advice, business owners can ensure a successful transition and the continued prosperity of their business.
To learn more, please contact Craig Barry for a 20-minute no obligation discussion. You can call Craig on +61 90) 7 3007 2000 or email contact@resourcesunearthed.com.au.
To learn more about Craig, visit this link.
Resources Unearthed is a solutions hub that connects senior executives, established professionals and business owners in mining and resources with proven specialist advisers.
This advice is general in nature, please seek professional advice specific to your circumstances.
