Finance for succession and exit planning

A succession sounds like a family conversation or a handshake with a long-serving manager. Underneath, it’s a sale with an unusual buyer: someone who knows the business inside out but rarely has the cash to pay for it. So the question that decides whether a handover happens on your terms is simple. Where does the successor’s money come from?

This page works through that question from both sides of the table: the owner stepping back and the person stepping up.

Who actually borrows in a succession?

In almost every case, the successor. The outgoing owner is selling an asset, and the incoming owner (a son or daughter, a manager, a group of key staff, or a co-owner) is buying it. The lender assesses the buyer.

That has a few consequences people don’t expect:

• The successor’s credit file and personal assets matter. A manager who rents and has no savings will find it hard to borrow the full price, however well they run the floor.
• Profit is measured after the successor’s wage. If the business has been paying the owner a modest salary topped up with dividends, the lender will recast the numbers for what the new owner actually needs to live on.
• The retiring owner often becomes a lender. When the bank won’t fund the whole price, the gap is commonly bridged by the owner accepting part of it over time. That’s vendor finance, and it turns the seller into a creditor of the business they just left.

business.gov.au makes the same point in plainer terms: a good successor has the skills, the desire to take over and the ability to afford to buy you out. The third test is where most plans stall.

Which finance options fit a handover?

Successions rarely run on one facility. Here is how the usual pieces compare.

Option	Best for	Security	Points to weigh
Bank acquisition loan	Profitable, well-documented businesses with a successor who has a track record	Business assets, often property, plus guarantees	Usually the cheapest money; needs full financials and takes time
Loan secured against the successor’s home	Funding goodwill or the deposit	A first or second mortgage over residential property	Strong option where the successor has equity; puts the family home behind the business
Vendor finance	The gap left once the main lender has done its part	Usually a security interest over the business, ranked behind the main lender	Keeps the seller’s money at risk after they leave
Equipment finance or refinance	Vehicles, plant and machinery that change hands	The equipment itself	Releases cash, or lets existing equipment loans move across
Non-bank or private business loan	A bank decline, a looming settlement date or a price that’s mostly goodwill	Property, often a caveat or second mortgage	Costs more; works best as a short bridge with a clear refinance path
Staged buy-in	Successors who need time to build equity and a record	Varies by stage	Slower handover, but each stage is smaller and easier to fund

Banks remain the natural first stop for a well-run business with clean books. If the business has a few years of solid, consistent profit and the successor has property to offer, a bank deal is worth pursuing seriously. Where the bank says the goodwill is too large, the successor is too new, or approval won’t land before the agreed date, specialist and non-bank business loans are the usual next step.

Why doesn’t retiring end your guarantees?

This is the part of exit planning that catches retiring owners most often. Over the years you’ve probably signed a personal guarantee for the overdraft, the equipment loans, a bank guarantee for the lease and perhaps a trade account or two. Most lenders also hold a general security agreement over the company.

None of that disappears when you resign as a director or transfer your shares. The guarantee is a separate contract between you and the lender, and it continues until the lender releases you in writing. If the business struggles under new management three years later, the lender can still come to you.

A clean exit therefore includes a debt plan:

1. List every facility and guarantee. Your accountant and a PPSR search will help find the ones you’ve forgotten.
2. Check change-of-control clauses. Many loan agreements require the lender’s consent before ownership changes. Selling shares without it can trigger a default.
3. Refinance or novate. The successor either refinances the debt in their own name or the lender agrees to swap your guarantee for theirs.
4. Get releases in writing, and that includes the landlord letting you off the lease guarantee.

When the successor’s new loan pays out the old facilities at settlement, the releases tend to follow naturally. When the old debt is left in place “for now”, owners can stay on the hook for years.

Planning a handover and want to test the numbers early? Run it past us: sixty seconds of typing, and nobody’s credit file gets looked at.

How do you work out how much the successor needs?

Start with the full cost of the transfer, then strip out what doesn’t need to be borrowed.

1. Agree a value. Get an independent valuation, even within a family. Lenders and the ATO both look sideways at prices that look arranged.
2. Separate the freehold. If the owner holds the premises personally or in a trust, they can keep it and lease it to the successor. The successor then funds the business only, and the retiring owner gains rental income. On a business with a $1m property, that can more than halve the borrowing.
3. Add transfer costs. Legal fees for the sale and the lease, valuation, any state duty on business assets, lender establishment and valuation fees, and the cost of refinancing the existing debt.
4. Add working capital. A new owner usually starts with an empty debtor ledger. Two to three months of wages, rent and supplier payments is a sensible buffer for most small businesses.
5. Subtract the successor’s cash and any vendor finance. What remains is the bank or non-bank borrowing.
6. Test it. Put the combined repayments, including vendor instalments, through the debt service coverage ratio calculator using profit after the successor’s wage. If coverage is thin, change the structure or the price.

What does a succession cost beyond the price?

Never assess a handover deal on the headline price alone. A realistic list for both sides:

• For the successor: loan establishment and legal costs, property valuations, any break costs on equipment being refinanced, and the total interest over the term. Ask every lender to put in writing what the loan costs in dollars across the years you’ll realistically keep it, then compare offers in the loan cost comparison calculator.
• For the outgoing owner: accountant’s and lawyer’s fees, the cost of a valuation, and tax on the gain.

Tax deserves its own line. The ATO’s small business CGT concessions can reduce or remove the gain for eligible owners. The 15-year exemption is available to an owner aged 55 or over who has held an active asset for at least 15 years and is selling in connection with retirement. The retirement exemption caps out at $500k over each person’s lifetime, and owners under 55 must pay the exempt amount into super. The basic conditions include either aggregated turnover under $2m or net assets of $6m or less.

One timing trap matters for vendor finance. The capital gain on a sale contract generally arises when the contract is made, not when the final instalment is paid. An owner who takes 40 per cent of the price over four years may face a tax bill before most of the money has arrived. Your accountant should model this before you agree the payment schedule.

Worked example: handing a landscape supply yard to a daughter and foreman

This is an illustration, not a real deal. Graham, 63, owns a landscape and garden supply yard in regional Victoria. His daughter Priya has run sales for nine years, and the yard foreman, Dean, wants a minority share. Graham owns the land personally.

They agree that Graham keeps the yard and rents it to the new company under a ten-year lease with options. The business itself (goodwill, two loaders, three trucks and stock) is valued at $900k.

Item	Amount
Business price	$900k
Legal, valuation and lender costs (estimate)	$40k
Working capital buffer	$60k
Total need	$1m

Funding	Amount
Priya and Dean’s cash	$100k
Equipment finance on the loaders and trucks	$220k
Loan secured against Priya’s home	$380k
Vendor finance from Graham, over four years	$250k
Business line of credit for stock and wages	$50k
Total	$1m

At settlement, the new equipment loans pay out Graham’s old truck finance, and his bank releases his guarantees on the overdraft and the equipment. Graham’s vendor loan is secured behind the home loan lender, with that lender’s written agreement. His accountant confirms he qualifies for the 15-year exemption and plans for tax arising at the contract date.

The deal works because each piece funds what it suits. The equipment funds the equipment, Priya’s property funds the goodwill, and Graham’s patience covers the rest. Graham also has rent coming in from the yard for as long as the lease runs.

What goes wrong with succession finance?

• Leaving it until a crisis. A health scare or a family dispute turns a planned handover into a rushed one, and rushed finance costs more.
• No independent valuation. A “family price” can upset siblings who aren’t in the business and invite questions from the ATO.
• Forgetting the other children. If one child takes the business, the others may expect fair treatment from the estate. Some families fund that through a separate loan against property, so plan it alongside the business transfer.
• Vendor finance without security. A handshake loan to a successor is generous until the business hits a bad year.
• Ignoring old guarantees. If the existing debt stays in place, so does the retiring owner’s risk.

A business that has a written exit strategy and a successor already visible to the bank gets funded far more readily than one whose plan lives in the owner’s head.

Ready to fund the handover?

Handing over a business you built, or taking over one you’ve helped run, is a big moment. The finance shouldn’t be the reason it stalls. We see successions at every stage: early number-crunching, a bank that has offered part of the price, or a settlement date that’s suddenly close.

Filling in our form takes a minute or so, and your credit report (or your successor’s) stays untouched while you ask. What you tell us isn’t auctioned off to a list of financiers, which means your mobile stays quiet. One of our team works through the handover personally, then phones to talk it over. Accurate numbers help most here: the agreed price, the property available as security and who exactly is buying. With those right, our first suggestion should be the one worth pursuing.

Tell us about your succession plan →