Passing your business on to the next generation is the dream of many family business owners, but it’s not always that simple. According to some studies, only around a third of all family businesses successfully transition from one generation to the next.
Succession planning is tricky for any business, but doubly so when it comes to your family business. You run into all the usual issues around finding the right person to run it, passing on skills, and transferring ownership, along with the emotions and conflicts that go hand in hand with running a business with family.
Conflicts and complications
Succession planning can be complicated by a number of factors. One potential issue is conflicting goals and values between family members or generations. Some family members may be focused on maximising the value of the business, while others might wish to maintain the status quo. As younger family members move to take over, conflict can arise with older family members who may wish to retire on income provided by the business.
Death or divorce can also cause problems, particularly if an owner passes stock and voting rights on to a spouse who was not involved with the business.
That’s why it’s a smart idea to think about succession planning early. Without the added stress of an illness, divorce, or parent wishing to retire, it’s easier to manage emotions and find solutions that work for everyone.
Here’s how to start thinking about succession planning for your family business:
1. Goal setting
If your business is to survive, you, your co-owners, and any potential successors need to have common goals and objectives. Talking about these goals is a good place to start.
Set goals around ownership of the business, financial compensation, and growth. Even if you start by talking about succession, you may decide that selling the business is the better option for everyone involved.
Even if your family business is well-run and your family relationships are stable, it may be a good idea to bring in a neutral mediator to help ensure goal setting is fair, disputes are resolved, and everyone gets input into decisions.
2. Seeking successors
These days, people don’t simply hand their business on to their oldest son. Many elements factor into choosing a successor – including skills and talents, experience in the business, and whether or not any of your potential successors actually want to take over. If you have a number of interested, capable successors on your hands, you’re lucky in some ways, but dividing a business between several people can also be complicated.
You will also need to think about the difference between ownership and management. If your potential successors don’t have the skills or experience necessary to run the business, you may need to bring in a professional outside manager or CEO, while your child or children retain ownership.
3. Planning the changeover
Timing and logistics are the next step. Are you planning to retire completely, or take a step back while staying involved in the business as a board member? How will this work? How long will the handover take? Every business has key information and core processes that need to be passed on – what are yours and where are they stored?
If you have essential information stored in your head, how will you transfer it to the new owner? If you have never done so, consider documenting your key processes and business knowledge before it’s too late – there are software programs to make this simple and efficient.
4. Transitions and taxes
Selling the business, or even simply transferring ownership within a family, isn’t straightforward. Options include outright purchase, a gift or bequest from one family member to another, or a combination of the two.
Whatever the transition plan, you will need to have the business valued accurately in order to create a fair sale and purchase agreement, minimise tax implications for the new owners, and make sure stock is transferred promptly.
A specialist accountant can help you navigate these issues and make sure everyone involved gets what they are owed.
If you’re ready to start thinking about succession planning, contact Giles Ellis – At GECA we’re family business accounting experts.