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Should sole traders be thinking about succession?

When Jim was 45 and in apparent good health, he suffered a heart attack that took him out of his business for a month. This was a wake-up call for Jim, who hadn’t previously considered what would happen to his business without him. If Jim had a business succession plan in place, he could have ensured his business ran smoothly while his health recovered.  

When you’ve worked hard to build your business, you want to ensure that when the time comes to transition out of it, the business is passed on in the way that you’d like. Succession planning is a vital part of any business strategy which addresses both the ownership and control of an enterprise, and it’s important to address the possibilities early on, rather than waiting for a crisis or a change in mind.

The succession planning issues you need to consider will differ depending on how you’ve set up your business – as a sole trader, partnership, trust, or company.

For sole traders, the greatest threat when it comes to succession planning is ‘key man risk’. In a sole trader business, the individual owns all of the business assets but also takes on all associated risks and liabilities in his or her own name. This means that the business can suffer a serious setback or even disintegrate when something happens to the sole trader, as the business is essentially that person, rather than a separate entity that might be able to continue.

Key man risk also refers to the fact that the business owner has a wealth of valuable knowledge about and experience with the business, which is often undocumented. This is a concern when considering succession, as business owners will take this knowledge and experience with them when they leave.

There are a number of solutions sole traders can consider to minimise the risks associated with business succession planning:

  • Changing the business structure: While there are a range of benefits in running your business as a sole trader, it may often be easier to pass the business on to others if its set up as a trust or company. There may also be tax benefits in passing on a business in this way, where there isn’t actually a disposal of any assets and the business merely continues.
  • Have the right documents in place: It’s important to develop documentation for all aspects of your business – if the unexpected happens, either you or your beneficiaries will need to have the relevant information at hand to make a decision on succession quickly. This material could include legal documents that provide all parties with instructions on what must occur, any relevant contracts, accounts and general personal documents of the sole trader that may relate to the business, e.g. their will.
  • Get the right advice: Getting holistic advice for all your business needs will also assist with making comprehensive and advantageous succession planning decisions.

Fortunately, with the right planning and structures in place, you can ensure your business and assets are protected and succession is smooth.

Next time, we’ll look at the succession planning considerations for partnerships.

The information contained within this article is of a general nature only and does not take into account your individual objectives, financial situation or needs. No direct or implicit recommendations are given and this should not be used as a substitute for specific professional advice.
Reading this article does not establish any kind of adviser-client relationship. You should always consult a financial adviser for advice specific to your financial situation. Perpetual disclaims any liabilities whatsoever from your decisions based or influenced by this article. Any reference to readers’ actual circumstances is entirely coincidental.