September 15, 2023

Successful Business Succession Acquisition – Personal Due Diligence

Business Succession Accounting

When mining and resources executives consider a major shareholding acquisition in the company that employs them, it’s imperative they undertake their own personal due diligence of the company.

In this article, I overview some of the key matters junior partners or new majority shareholders need to consider and the responsibilities involved in being a major shareholder BEFORE they commit to what may be one of the largest personal commitments of their life.

For mining and resources executives invited to buy-in to their employer company or buy-out existing major shareholders, it’s not enough to rely on a presumption that the business is financially fit.

It’s important for incoming shareholders to conduct their own thorough personal due diligence.

The junior partners involved in the private consultancy acquisition behind our Successful Business Succession series were in an unusually fortunate position that provided exceptional visibility of the company’s financials.

This was because the major shareholders, and the company itself, had a strong business succession culture which placed the incoming shareholders close to the financial management and operations of the company for several years leading up to the acquisition.

However, for most aspiring major shareholders the process of investigating the financial health of a company is considerably more involved.

At a minimum it would require a clear understanding of the company’s historical, current and expected future financial position.

This would include an understanding of how dividends are paid on retained and future earnings, along with any personal responsibilities for guaranteeing existing business debts and obligations with regards to a range of employee and ATO obligations, such as superannuation guarantee and PAYG withholding.

There can be statutory time limits for incoming owners/directors undertaking their due diligence of the company’s obligations and liabilities. If not observed, potentially they could become statutorily responsible even if they subsequently resign as directors, or if the liabilities arose during a period they were not involved in the management of the business.

It is now commonplace for banks and lenders to insist incoming shareholders and directors obtain independent legal advice to ensure there is a sound understanding of the obligations and possible personal impacts of any personal guarantees provided.

While the incoming shareholders in this series weren’t required to dedicate a great deal of time to reviewing the consultancy’s financial position due to their roles in the business, providing direct day-to-day visibility of the company’s financial strength, they did need to implement individual tax structures that would cater for their individual circumstances now and in future.

As they had been involved in the succession process for some time, each incoming partner already had a Family Trust structure in place.

However, due to the multi-million-dollar value of each partner’s shareholding and potential funds from future share acquisitions and buy/sell insurance claim proceeds in a buy/sell trigger event, where and how all that would be structured needed to be nailed down.

Further, as the incoming partners were all aged mid-30s and 40s, like their predecessors they too planned to carry forward the succession culture, retire early and bring through the next generation.

While superannuation is a tax effective structure, access to tax free money for funding retirement is generally limited to those 60 years and older.  As such, superannuation was considered a lower priority for these incoming shareholders, given their early retirement plans.

A corporate beneficiary structure (often referred to as a ‘Bucket’ company) was among the solutions considered. This type of structure can hold retained earnings, deferred income from dividends along with direct equity ownership in the company as other shareholders sell down their holding and providing the partner with a tax effective and accessible structure.

The primary complication of using a corporate beneficiary is to ensure Division 7A issues to do with loans and a financial accommodation provided by a private company to shareholders and their associates, are understood and managed appropriately.  Advice should be obtained from an experience tax advisor in this regard.

In this situation, given the medium-term plan for the incoming shareholders to retire early, it was agreed that the use of a corporate beneficiary would assist in achieving this goal.  This structure should allow the new partners to accrue dividend income from the business in a relatively low tax environment (compared to personal income tax brackets), which can be released over time once they have ceased paid employment and exited from the business.

Estate planning is also needed to manage the considerable financial and tax complexity that would include a potential buy/sell lump sum claim and share transfer.

In this particular situation, the company had a policy of having insurance backed buy/sell agreements in place, which would fund the buy-out of a partner’s shareholding in the event of their death, disablement or significant medical condition.

A common issue with buy/sell agreements is that the value of the shareholding and the linked life insurance policy tend to diverge over time.

This often occurs where the insurance value is set and left, while the value of the shareholding typically increases over time.

This could result in a situation, at the time of a partner’s death, where there is a significant gap between the current value of the shareholding and the value of the insurance cover at buy-in.

Typically that difference would need to be funded by the remaining shareholders, by the company itself or through external bank finance.  Regularly reviewing the company valuation and ensuring insured amounts are updated accordingly would mitigate this situation.

The theme throughout the Business Succession Success series has been ‘it’s complicated’ and so too are the tax structures. These are influenced by many interacting financial planning, insurance, legal and tax matters affecting the business, each individual partner (including their family needs and personal estate planning).

The key to successful business succession is methodical, informed and collaborated advice that considers each and all parts of the whole.

To learn more about the tax implications and the structures necessary for successful business succession, please contact Craig Barry on +61 (0) 7 3007 2000 or email

To learn more about Craig, visit this link.

Resources Unearthed is a solutions hub that provides integrated financial, legal, accounting, tax and business advisory services for executives, professionals and business owners in the mining and resources sectors.



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