David French | 12/07/2010 8:49:30 AM

This article was first published in The Morning Bulletin under the heading Sucession Planning LN Input on 07 April 2010.

Regularly driving around Australia’s backblocks, there is plenty of evidence of short-sighted decisions that are costing our community now. The disintegrating infrastructure of the Baralaba rail line, makes me wonder about the futility of the millions of pounds of public money spent and the lives of now-departed workers.

Now the Baralaba coal mine is back in operation and, wouldn’t you know it, cropping conditions are likely to be sensational. Unfortunately our network of county trains has been decimated and money is about to be poured into opening a new inland rail link (IRL). It makes you think that structural improvement early on might have meant that many of these lines continue to operate, complementing the IRL, integrating communities and lowering costs.

Few people would walk away from their house, but every day small businesses close due to the retirement of the principal. Like the railways closing down small businesses on retirement not only detracts from the owner, but it robs our community of skills, experience and job opportunities built up over years.

The solution lies in proper structuring and investment, but too often the perceived short-term tax benefits of partnership and trust structures get in the way of the long term interests of the proprietors. These include protecting the businesses income stream in the event that the owner cannot continue to work, and devising a mechanism by which the value of the business can be realized when the principal decides to retire.

Involuntary incapacitation can be dealt with through a specially prepared life insurance plan so that the business can continue to run, or to purchase shares from the owners if the business must close. But what of pre-determined retirement? A business with free cash flow will probably have value - the trick lies in structuring it properly.

Keeping the business separate from personal finances is a first step, and the cleanest way to do that is through a company. Interesting opportunities arise when a company can take on outside shareholders, rather than relying on bank debt. That might mean giving away some control, but it means innovative succession planning measures can be put in place. Through the use of facilitators like The Australian Small Scale Offer Board, such measures properly applied can mean the difference between walking away from a lifetime’s work, and realising substantial value for the current owners, and indeed the community.

The Investment Collective (AFSL 471728) is a non-aligned financial planning and investment firm specialising in providing tailored financial and investment advice for individuals and small business. Capricorn Investment Partners Limited's services include financial planning, share trading, portfolio management, insurance broking and self managed super fund administration. Additional information on services provided by The Investment Collective Limited can be found by following this link. Readers are reminded that this document has been prepared for general information purposes only, and any advice contained herein has been prepared without taking into account your financial objectives, situation or needs. Readers are advised to see their financial advisor prior to acting on any general advice.

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