But for all your careful thought and preparation, things don’t always go as intended.
In our long experience of helping family businesses with succession, there are two situations that can go awry. You may decide that only some of your offspring should be involved in running the business – or potentially, none at all.
Some in, some out
If some of your children are to take over, and others aren’t, how do you make sure they all benefit from the family wealth? And how do you find an arrangement that everyone is satisfied with?
This demands some delicate management. The key is to understand what works for each family member – and of course for the business.
To state the obvious, it generally goes one of two ways: dispute, or agreement (invariably with a degree of compromise).
Problems can arise when owners singlehandedly decide to divide the business up between all of their children. It’s quite common to discover that those not involved in the firm aren’t interested in share ownership.
Though well intentioned, share ownership doesn’t always suit those who won’t be involved in the firm. They may prefer to ‘cash out’ straight away.
This can lead to disputes over the value of the shares they’re being given. The result may be a protracted and costly litigation, which requires the new owner(s) to raise funds and buy their siblings out.
It sounds drastic, but we’ve seen this happen when due care and attention aren’t given to the succession process. Such cases can be distressing, as they put severe pressure on family relationships.
Having a skilled family business adviser can help with the stresses and strains of what is undoubtedly a difficult process. We can not only help firms to raise and structure funding; we’ll also act as a personal mentor, and an impartial mediator between family stakeholders, to help reach an agreement everyone’s comfortable with.
If not everybody wants share ownership, the answer may be to give this to those who take over; and bequeath other assets – your house, for example – to their siblings.
Once an arrangement has been found, you’ll need an expert to take you through the business valuation process; and the statutory process of transferring share ownership. You should also seek advice on the capital gains , inheritance and other tax implications for all concerned.
The result of your succession planning may be that none of your children are capable of, or interested in, taking over the business.
In this case, there are two routes open to you: sell the company, or retain ownership and make an external appointment.
Selling the firm may involve a management buyout (MBO) or an external third party.
If external, there may be scope for some or all of the management team to stay on, for the short term or permanently.
Whatever the arrangement, think about whether you want to remain in the business for a transition period. Some buyers may prefer this arrangement.
Selling will mean getting a valuation of the business, and appointing an agent to find a buyer. We can run the sales process for you and optimise your post-sale tax position. You might also need a bit of moral support: seeing the business leave the family can be an emotional time.
Retiring from the business won’t necessarily mean giving up ownership. You could appoint someone from outside of the family to run it for you.
Again, this can prove an emotional wrench. It can be difficult for family business owners to give up control of something they’ve spent years building, and which may have been in the family for several generations.
Then there’s the performance risk that comes with somebody running the firm who doesn’t know it like you do (and lacks the same emotional investment). You might want to incentivise external appointees with a percentage of the proceeds from a future sale. Again, this needs careful implementation and specialist tax advice.
Succession is partly a business decision. But it’s also a people decision: a decision about not just abilities, but also ambitions and personal relationships.
Crucially, it must be an objective decision. Yet taking an impartial view of your children’s capabilities and drive won’t be easy. At the same time, you mustn’t encourage someone to take over without the vision to ensure your business thrives under their leadership. And you mustn’t assume that all of your sons and daughters will want ownership.
Whatever your succession strategy, the need to start the process early can’t be overstated. It takes time to groom the next generation, or to find external appointees who are right for your business.
Getting succession right is vital for the future of your business and your family. Don’t put yourself under pressure to make decisions in a hurry, or leave yourself with no option but to sell under duress.
To discuss how Goodman Jones can help you to plan for succession at your family business, contact Larry Phillips.
This is part three of a series of blogs on family business succession. You can read the first two instalments here.