By John Turnbull, Partner, and Jason Maletic, Senior Advisor
Undoubtedly, the topic of “succession” and “succession planning” has been (no pun intended), done to death in the real estate industry.
Seemingly every professional adviser, from bankers to lawyers and financial planners to accountants, has had something to say about the importance of succession planning. Most of them are right and provide some terrific insights, but it still seems that this topic rears its head every year as we approach June 30.
Whilst this might be true, it doesn’t negate the importance of turning your mind to it if you’re a business owner and considering why a succession plan is important.
As lawyers, we think the importance of succession is in the ability to mitigate risk and maximise value on the exit of your business.
2015/16 has been an interesting year. By all accounts, most estate agency businesses have done reasonably well. Whilst the perennial problem of good quality stock has been a continuing challenge for some, the low interest rate environment and general health of the Australian economy has meant property prices have remained stable and auction clearance rates (on average) above 70%.
For those business owners who manage property management businesses (by which we mean residential and commercial rent rolls, and owners corporation/body corporate businesses), demand for good quality assets remains as strong as it’s ever been. This means that if you manage the equivalent or greater than what Macquarie Bank tells us is the average number of properties under management, the value of your asset may very well be greater than the median house price in Melbourne and Sydney combined.
Succession planning therefore is not just about planning for an unforeseen event – it is largely about maximising wealth on exit.
And the reason why succession planning is important is that the decision as to when you exit your business may not be something which you are always in control of.
There are the obvious triggers, such as death and disablement, but over and above that, the ability to maximise value on exit is largely the result of careful planning and making your business “sale ready”.
As specialist lawyers to the real estate industry, we advise upon a variety of “succession” transactions, including the internal sale of businesses to incoming (usually junior) staff, to the external walk-in / walk-out sale of a business to a third party. Internal sales to incoming staff are fairly common. However given the value that rent roll businesses attract, it is typically very difficult to sell your business to an incoming partner at once. Even if that incoming partner is willing to purchase your business in its entirety, the ability to raise the necessary capital means that (usually) either the business will need to be put up as security, vendor finance may need to be considered, or a form of deferred consideration or earn out becomes part of the structure of the purchase.
These issues also sometimes extend to third party sales, albeit another layer of consideration enters the equation regarding the option of selling your company versus selling your business and assets.
The latter is particularly important in rent roll sales as generally a property management asset can be novated by assignment. However this is on the proviso that your existing management authority contains the relevant provision enabling the rent roll to be assigned. Absent any express assignment provision, a rent roll sale (as an asset sale) will require new management authorities to be executed by the incoming purchaser. This in turn creates seller’s risk either by a discount to the purchase price or a cumbersome retention sum.
Other considerations include the transfer of employees (and their associated entitlements), key staff (including principals), existing liabilities of the business (such as trade debtors, other debt, loans for cars, etc) and restraint.
Being “sale ready” means understanding these aspects of your business and preparing your business in advance of a sale event. If you’re unsure, you should seek the appropriate advice to help you navigate through these issues.
Tax unfortunately is also often an afterthought in the sale process and whilst we would never advocate selling a business to obtain a favourable tax outcome, you should consider your position. Speak with your professional adviser (either your accountant or lawyer) early on and enquire as to whether any concessions may apply (such as the small business tax concessions) in your circumstances.
For multi-owner businesses, it is also important to consider the arrangements between existing shareholders in the event of a sale, irrespective as to whether that sale is one that is forced or voluntary.
This means considering the value of your asset up front or at least having a mechanism in place to determine that value.
It also means having an effective shareholders deed between the parties. We have all too often seen an exit strategy end up in dispute because one shareholder wants to exit the business and the parties do not have an effective shareholders deed between them. Our advice would be to agree on the terms up front and before “exit money” becomes an issue. Any cost you incur by implementing this process properly and up front will be worth it in the long run. It will save you the considerable pain (and cost) you will suffer in trying to work through the mechanics of exiting a partner from your business where the terms of exit are loosely (if at all) defined.
On the eve of AREC 2016 and where the focus will be on innovation, there is no better time to be turning your mind to planning for the future.
What do you want your legacy and net position to look like when you exit?
For more information, please contact:
T: +61 3 8568 9519
 The national average is 508 properties under management (residential) according to Macquarie Bank’s Residential Real Estate Benchmarking Report, 2014.
 The median house price for Melbourne is $718,000 and for Sydney is $1,025,478. Source: REIA. Weighted average median house price for eight capital cities at December 2015 quarter.