One of the toughest decisions that any family business may face is whether the business will be passed on to family members or sold by the retiring generation. This decision not only threatens the continuity of the business, but can threaten the family unit itself and often leads to costly litigious disputes.
There are many other obstacles to successful continuation. Fortunately these can be overcome by detailed succession planning on both a personal and business level.
Importance Of Succession Planning
According to the Family Business Institute, only 30% of family businesses survive into the second generation, 12% are viable into the third generation and only 3% succeed into the fourth generation.
Initially, most family businesses are straightforward in terms of ownership and management as they develop a relatively simple system of natural governance. However, as a family grows and the demographic changes, the roles of different family members become more complex. It can be difficult to establish, and in particular to agree upon, a clear balance of power and to have clarity of roles within the business.
Objectives Of Succession Planning
Retiring generations may wish to achieve one or more of the following:
Provide financial security and career opportunities to family members;
Optimise and manage family wealth through future generations;
Carry on family tradition in business;
Maintain the family reputation in business;
Use the family business as a nucleus to keep an expanding family closer together; or
Continue to support loyal employees, suppliers and other stakeholders.
Two Key Areas Of Planning
Critical to the success of any family business is the vision that the family has for that business. Every family is unique and individuals within a family may have different visions for the business.
Some members may only be interested in having an ownership role to fund their own lifestyles, while others may be determined to uphold the family reputation in business and get involved in the management of the business.
Interlinked, separate and detailed planning is necessary to address two keys areas; management and ownership.
1. Management Succession Planning
Who will manage the business in the future?
There may be uncertainty as to whether future generations will have the aptitude, experience or motivation to successfully manage the business in the future. In some cases, it may be deemed necessary to outsource one or more managerial roles to non-family members to ensure the continued success of the business.
2. Ownership Succession Planning
Professional advice should be sought in respect of the ownership aspect of succession planning as choosing the correct structure is crucial.
The following structures offer many advantages in terms of asset protection, estate planning and tax efficiency, and ensure ease of transition between generations:
Shareholding in a closely-held company;
Trading / family trust; and
For example, shares directly held by individual family members in the family company will need to be sold or transferred at some stage in the future, for example, upon the death of the shareholder, divorce settlement, or following a voluntary decision by the owner to sell their shares. In these circumstances, there may be significant delay with the transfer of ownership and adverse tax implications.
There are many advantages to having the business owned by the trustees of a trust. These include creditor protection, minimising taxation, and “passing” the business to family members without the need to transfer the shares from the trustee.