BUSI­NESS DE­POT

Only an es­ti­mated 10 per cent of real es­tate busi­nesses have a suc­ces­sion plan in place. Many de­fault to the idea that when the time is right they will sim­ply sell the rent roll, while oth­ers as­sume their kids will take over at some point. As John Knight

Elite Agent - - CONTENTS - John Knight

Done well, a suc­ces­sion plan can de­liver real value to both the in­cum­bent and the suc­ces­sor – it has to be a win­win sit­u­a­tion for both par­ties.

START PLAN­NING EARLY

I sug­gest that you need to have started your suc­ces­sion plan at least three to five years out from a po­ten­tial exit date. This gives suf­fi­cient time to: • Min­imise tax by re­view­ing the le­gal struc­ture and un­der­stand­ing the tax im­pli­ca­tions of a sale • Pre­pare your rent roll for sale by check­ing your com­pli­ance and re­mov­ing in­ef­fi­cien­cies • Max­imise the value of your rent roll by show­ing good prof­itabil­ity and min­imis­ing risk • Iden­tify po­ten­tial suc­ces­sors, whether from within or ex­ter­nally • Mar­ket your busi­ness, how­ever you de­cide to do this.

SALE OR TRAN­SI­TION?

Not ev­ery suc­ces­sion in­volves a sale of your rent roll – in fact, the most suc­cess­ful suc­ces­sions I have been in­volved with did not in­volve a sale of a rent roll to an ex­ter­nal party in one trans­ac­tion. I would urge you to also con­sider: • En­tity sale rather than rent roll sale; in some states this can re­sult in ma­te­rial stamp duty sav­ings to the suc­ces­sor • Fam­ily gen­er­a­tional tran­si­tion, a very tax­ef­fec­tive way to trans­fer con­trol if you have a fam­ily trust within your struc­ture • Man­ager or key per­son buy­out, of­ten in­volv­ing the in­cum­bent re­tain­ing some eq­uity in the busi­ness or fi­nanc­ing with ven­dor fi­nance • Rent roll breakup and of­fload­ing in parcels, with the idea of max­imis­ing the value re­alised – al­though this will re­sult in an in­creased ad­min­is­tra­tive bur­den • A com­bi­na­tion of all op­tions; maybe a par­tial sale of the rent roll be­fore sell­ing shares in your com­pany to fam­ily or man­age­ment.

IS IT MORE THAN ONE TRANS­AC­TION?

As rent rolls get big­ger and big­ger, the mar­ket for those who can buy the rent roll in one trans­ac­tion is get­ting smaller and smaller. Yes, there are the well-known big play­ers in the mar­ket who may be able to af­ford to fund it in one trans­ac­tion, but for some­one to buy even a $1m rent roll they are go­ing to need to have eq­uity of around $400k avail­able to make the trans­ac­tion hap­pen – and that’s be­fore work­ing cap­i­tal.

SUC­CESS­FUL SUC­CES­SION

The most suc­cess­ful suc­ces­sions I have seen: • Started well be­fore the ex­it­ing party has any ur­gency around an exit • In­volved the in­cum­bent

re­duc­ing their eq­uity in­ter­est over time in a struc­tured sell­down (say, 10 per cent a year) • Re­quired the in­cum­bent to help the suc­ces­sor fund their pur­chase into the busi­ness, usu­ally by al­low­ing them to use se­cu­rity in the rent roll for debt but also to jus­tify a higher price • Knew ex­actly how the exit would work from a cash and tax per­spec­tive by mod­el­ling dif­fer­ent sce­nar­ios in ad­vance • Doc­u­mented the suc­ces­sion plan for all par­ties, in­clud­ing the valuation method­ol­ogy to be used within the share­hold­ers’ agree­ment.

Don’t know where to start with your suc­ces­sion plan? I’d sug­gest tak­ing a sim­ple, clas­sic ‘Now, Where, How, Why’ plan­ning ap­proach. Where are you now? Where do you want to be – and when? How will you make that hap­pen? Why do you want to sell?

The ‘how’ is the hard bit be­cause usu­ally there are many op­tions avail­able, but the ‘why’ is im­por­tant to make sure the in­cum­bent has a planned life af­ter their exit. •

John Knight is the Man­ag­ing Di­rec­tor of busi­nessDEPOT, a team of en­er­getic ac­coun­tants and ad­vi­sors. For more in­for­ma­tion visit busi­nessdepot.com.au.

As rent rolls get big­ger and big­ger, the mar­ket for those who can buy the rent roll in one trans­ac­tion is get­ting smaller and smaller.

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