Succession Planning

Handing down the family business can be a delicate affair. We’ve all heard the stories. Parents who won’t let go. Children not ready for the job. Dysfunctional relationships both at home and in the office.
Passing ownership may allow you to retire, but can also motivate and incentivise the next generation to drive the success of the family business. Many issues need to be considered prior to passing the business on to the next generation:

When is the most appropriate time to pass on the family business?
Can the retiring owner extract value, or how can the retiring owner fund their retirement?
What are the expectations of family members who may not wish to participate in the business?
What is the future strategy of the business or distinct business lines?
Are there conflicting goals or values between generations?

Amongst the many issues to consider, tax is a very important matter to understand at an early juncture. Tax law in Ireland currently provides for favourable tax treatment where a family business is being passed to the next generation. This applies in particular where the parent is more than 55 years of age.

Once a decision has been made to transfer or dispose of a family business, it should be done appropriately from an accounting, tax and legal perspective. Often, there are a number of steps that have to be taken prior to passing on a business to the next generation, or alternatively preparing a business for sale. Sound advice throughout the process should provide maximum benefit to all stakeholders with minimum damage to the underlying business.

Step 1: Establish Goals & Objectives
• Review current succession plan and reasonableness of achieving desired goals.
• Develop a collective vision, goals, and objectives for the business.
• Determine the importance of continued family involvement in leadership and ownership of the company, but consider the option to bring in professional management.
• Establish personal retirement goals and cash flow needs of retiring family owners.
• Identify goals of next generation management, both personal and business.
• Identify and retain a team of professional advisors.

Step 2: Establish a Decision-Making Process
• Identify and establish governance processes for involving family members in decision-making.
• Establish a method for dispute resolution if needed.
• Document the succession plan in writing.
• Communicate succession plan to family/stakeholders.

Step 3: Establish the Succession Plan
• Identify successors – both managers of the company and owners of the business.
• Identify active and non-active roles for all family members.
• Identify required additional support for the successor from family members.

Step 4: Create a Business and Owner Estate Plan
• Address taxation implications to the owner/business upon sale or transfer of ownership, death, or divorce.
• Review owner estate planning to minimize taxes and avoid delays in transfer of stock to remaining owners or spouse.
• Create a buy/sell agreement that is fair, reflective of the value of the business, and minimises taxes.

Step 5: Create a Transition Plan
• Consider options: outright purchase, gift/bequest, or a combination of these.
• If the business is to be purchased, consider financing options including financing from an external party or self-financed from the retiring owners on a deferred payout basis.
• Establish a timeline for implementation of the succession plan.
Not every family business will survive and many do fail, primarily due to differing family interests and the ability of the next generation to grow the business. Taking these five steps now will save money and time and will help assure the continued success of your business.