The art of business succession: are you prepared?

No matter which approach you take when it comes to succession planning, it’s important to start early and be thorough in your consideration of all potential options for the business’s future. This is especially the case for family-owned businesses that must account for the preservation of family wealth and at the same time address the host of additional issues directly related to the enduring success of their business.

There are many factors to consider when a business starts the succession planning process. You will need to think about whether you have defined your personal goals and vision for the transfer of ownership and management. You have to identify and then appoint a successor.

There is also the consideration whether the family will continue to be involved in the business, in either a leadership or ownership perspective. We have found from experience that the founder of the business wants a role going forward even if it’s mentoring the next generation of leaders.

Some of the other matters you need to address include:

  • Understanding what is being sold and/or handed to the next generation and how to present the business.
  • Tax planning – ensuring the business is structured to maximise the cash flow position of the vendors/ family.
  • The strength of the buy-sell agreement between shareholders.
  • Contingency plans should senior management become disabled or terminally ill.
  • Appropriate corporate structures.
  • Retirement planning for senior family members.
  • Business valuation.

If there are plans to continue running the business in family hands, four crucial factors must be taken into account. These are:

1. Management talent

Management succession is an important aspect of operations, especially with privately owned businesses. Businesses need to have a formal process to ensure that the management team has the right competencies. It’s also important to have a talent development program and a grooming regime if the next generation is taking over the business.

Often listed and large corporations create the right environment for the development of management through existing talent management programs. But in a family business, owners sometimes fail to develop formal programs to groom the next generation’s management team and believe the skills will transfer automatically.

Businessman in Conference Room --- Image by © Tim Pannell/Corbis
Its never too soon to start succession planning

2. Entity Structure

Different business structures (such as private companies and trusts) have their advantages and disadvantages, and it’s worth understanding what these are when planning the succession of the business so it operates in the most beneficial structure possible.

Companies: The advantage of establishing a business in a private company is that it provides a corporate ‘veil’ of liability protection and it is a separate legal and taxable entity. However, companies can be subject to onerous tax provisions that must be fully understood before choosing the right structure.

Trusts: There are a variety of trusts including discretionary, fixed/unit and hybrid. The flexibility of trusts is perhaps the major reason that they are so widely used in tax planning as they can help manage and protect assets and provide privacy.

3. Disability and contingency plan

Business owners have more responsibility than regular employees and need to have a contingency plan in place. Shareholder agreements provide restrictions on the transfer of shares or other interests for the protection and benefit of all shareholders. In many cases a shareholder agreement protects the interest of the minority owners.

4. Business valuation

A valuation takes into consideration the embedded goodwill and net wealth in the business. Under a family succession model the maximum wealth isn’t always realised by the family, as the business is either gifted to the next generation or transferred at a discount with vendor financing, which might impact the retirement plans of the family.

5. Legacy

Finally, business legacy is often one of the overriding goals of business owners developing a succession plan.

Family businesses are some of the commercial enterprises most in need of a formal management-succession plan. But in our experience the stumbling block is implementation of this plan. This is where trusted advisers can add value, in helping to realise the succession vision for the enterprise.

It’s never too early to start planning for the succession of your business. And the earlier you act, the better the result for the business and everyone associated with it will be.

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