“Inadequate family business continuity and succession planning is one of the main reasons why so few family businesses survive. The best way to sustain a successful and enduring enterprise is to implement an integrated plan which sets out how the business will pass down assets, develop capabilities and transfer responsibilities and roles”, says Feargal McCormack, Managing Partner of FPM.
The transfer of power from one generation to the next is one of the most emotionally fascinating challenges facing family businesses. Empirical evidence clearly demonstrates that delaying or poorly planning this transition can create havoc for a business in both the short and longer term.
A key question for proprietors is how to reconcile individual and family aspirations with the commercial goals of the business. At a high level, there are three key issues to address—whether they think it is better to:
- Sell the business;
- Divide it up; or
- Transfer it in whole to the next generation.
The importance of getting this decision right cannot be overstated as the actions taken by each generation will shape the family and business for decades to come.
Family Business Continuity and Successful Succession is a Process not an Event
Effective continuity and succession planning requires cross-generational collaboration. While the senior generation will make the final calls, everyone needs to know how the transition will work.
A common misconception is that the oldest child should take over as Managing Director. This should never be assumed. Likewise, it should not be assumed that all children should have equal shareholdings. The important thing is to choose the right people for the right roles and ensure that the right ownership structure is in place.
In circumstances, where it is not appropriate to pass the business on to family members, it may be necessary to bring in outside professional management and then transfer profits to the family via dividends.
A key component of continuity and succession planning is making sure that the business is ready for sale, even if you never intend to sell it. It can take up to three years to achieve this.
A firm focus on looking after the business will enable it to continue look after the family for generations to come.
Family Business Continuity Plan
The most successful family business succession transitions are those that result from establishing a partnership with the next generation based on mutual responsibility, respect and commitment. In our experience it is best to address the transfer of family personal assets and business assets when the senior generation are in good health. Adopting a partnership approach helps to minimise the likelihood of future family disputes.
Here are some key steps you should consider for the successful succession of your family business:
- Start the planning process early.
- Prepare a Statement of Affairs setting out business and non-business assets.
- Develop a written succession plan such as a Family Agreement. (While this is not a legal document, it facilitates preparation of other documents such as Shareholders Agreements, Partnership Agreements and Director Service Agreements all of which are legal documents).
- Involve the family and colleagues in your thinking.
- Avail of outside help (succession facilitator).
- Treat all children “fairly” from both a family and business perspective. Focus on providing clarity and removing uncertainty.
- Establish a training process and develop the next generation’s management capabilities.
People who own successful enterprises often view their business as a personal nest egg which will guarantee their financial security when the time comes for them to step down. This is a major mistake as neglecting to manage personal finances can lead to financial hardship if unforeseen circumstances arise.
The options for business owners when it comes to managing and preserving wealth are either ongoing cash withdrawal or building up the balance sheet and restructuring. We recommend a combination of both, with a greater emphasis on regular cash withdrawals as this avoids placing all your eggs in one basket.
Tax is another area where careful planning is required, particularly in regard to Capital Gains Tax (CGT) and Inheritance Tax (IHT). From a Northern Ireland tax perspective, transferring shares in a family business or selling the business is generally liable to CGT, and family businesses are generally CGT friendly. In respect of Inheritance Tax, Business Property Relief can provide 100% exemption from IHT on death for qualifying companies (broadly trading companies).
FPM and the AAB Group work with family businesses to balance family and business needs, de-risk and maximise family wealth, plan for succession and implement governance frameworks supported with appropriate policies and procedures. Our objective is to help family business owners achieve peace of mind, knowing their family’s wealth is protected and preserved for the benefit of future generations. For more information on how FPM can support you and your business on this journey, contact us today.