Importance of succession planning for family businesses: the good, the bad, and the ugly.
All family business owners at some stage have to decide when is the right time to hang up their shoes. No matter how certain the future appears, succession planning is an essential part of doing business which needs to be considered years in advance of the planned departure. Otherwise, it could jeopardize the continuity of the business while leaving less value for beneficiaries to inherit.
It’s easy to put off planning when everything is going well but this is actually the opportune time to begin formulating and executing an effective succession plan. Perhaps children or other family members are to continue the business. With income, gift, and potential estate taxes, careful planning is required to transition it over to the next generation or there may be less value for beneficiaries to inherit than originally intended. Ensuring business continuity with the smallest possible tax consequences is key.
The Good (Pros)
Developing a successor plan allows the business time to grow, evolve into an even stronger entity, and therefore succeed after the owner’s planned exit. Appointing a formal successor also helps give peace of mind while running the business. The owner will have taken the time out to carefully select the successor and can rest assured it will be in good hands when they leave. Creating the plan well in advance gives plenty of time to train the successor on the day to day duties and larger concerns regarding the business, introduce them to key customers or suppliers, or acquire new skills sets such as people management and inter-personnel skills. A plan helps eliminate confusion as to who will carry on the legacy when the owner is no longer available to make decisions and helps avoid potential for disputes between family members taking over the business which can frustrate and devalue the business and ultimately cause it to fail. It outlines the important specifics for a smooth transition between owner and successor.
The Bad (Cons)
Failure to determine the right, and appropriately grooming, the successor could result in poor company performance, potentially placing undue risk on the owner’s retirement income. A poorly conducted succession planning process will lead to poor decisions, dis- harmony, and, ultimately, poor company performance. The only thing worse for a family run business than not doing a succession plan, is doing one poorly. Seek professional help from experienced tax, accounting, financial and legal advisors – succession needs to be well planned and well executed. If something were to happen to the owner, this could lead to confusion over the owner’s plans regarding the future leadership of the business. If the owner favours one child or business colleague over another in regards to managing the business, and, if this is not considered to be fair, it can have a catastrophic effect on the small company. Also, family rivalries can cause a business to fall apart if not addressed effectively.
The Ugly (Myths)
There is plenty of time: Procrastination is public enemy number one when it comes to planning of any kind. Failure to acknowledge the reality of the lost opportunities that come with the passage of time can be disastrous. Time can be your enemy or your friend. Waiting until after an event, such as death or disability, is not planning, but crisis management. The reality is none of us know how long we’ve got.
It’s easier to just sell the company: Selling a business is rarely just a matter of listing it for sale. The value of a business and the tax impact when selling can vary greatly depending on preparation. A sale to a third-party is a viable option, but it still requires planning. Competitors competition may also take advantage of this and steal away current customers, reducing the value of the company before it can be sold.
A successor will be ready when I am: A successor may be needed prior to the planned transition date. If not preparing the successor now, they will not be prepared to take over in the future. A longer period of quality mentoring will provide a great return on the owner’s investment. Prepare the person not just on the technical side of the business, but also in the relationships that are important. Remember, the quality of the owner’s retirement will likely be dependent on their success.
Equal is synonymous with fair: Transitioning the equity and ownership of a business to multiple family members equally may not be the best strategy. If the owner wants the business to succeed into the next generation, it will require a different analysis that recognizes what will be required to make the business successful.
Giving up ownership means losing control: A well thought out and well timed plan will allow for a controlled transfer, while still effectively transitioning the business to the next generation. But remember, ultimately the goal is to transition the business to a new owner. The owner has to accept the change of control but this can be structured so that it is done so gradually over a period of time.
The KISS principle (Keep It Simple Stupid): Keep the plan simple. An overly complex plan could prove burdensome to manage and could leave a greater possibility for a disharmonious transition.
The Lupton Fawcett LLP Corporate Team in Sheffield has substantial experience of helping owner managers of businesses of all shapes and sizes and across all industry and service sectors throughout South Yorkshire develop and implement a succession plan. The team can help assess succession routes and strategies, bring clarity and prioritization to this process, and put in plan that works and achieves all the owner’s objectives without stress or hassle.
If you are a family business looking for advice, please contact a member of our specialist Family Business Team.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.