Planning ahead for the future of your family, or your business is key.
Succession can be both planned and unplanned. An event of unplanned succession is likely to be chaotic as well as emotionally draining. At worst, the business, farm or estate could grind to a halt while the family struggle to obtain 'Confirmation' (probate) for the owner’s estate. It might also be that the practical aspects of running the business have gone to the grave too - for example banking passwords, key supplier relationships and customer arrangements. There are also some heavy-duty tax issues to consider, particularly Inheritance Tax, which need careful planning.
Why would a founder choose to leave this chaotic burden behind for their family? Especially so if there is a complex business or asset in the background. Common reasons for the lack of a plan are often because the founder can’t face the prospect of making difficult decisions or risking disharmony amongst the family and so they avoid the issue entirely. Or perhaps they are simply too busy with the day to day running of the business.
An effective business succession process, on the other hand, would involve a well-considered and written Will, a separate plan for the business in the event of the founder’s death, a record of practical issues, a set of constitutional documents for the business, good communication and a group of people who are ready and waiting to take the business forward.
A good starting point would be to take advice from advisors who are experienced in this area, as well as talking through the issues with peers who have been through a similar process. However, pre-determining a fixed outcome may end up in difficult territory. It is worth asking each of the next generation, or indeed the management team, what their plans and aspirations are and of course managing their expectations. Often, in the families we have supported, we have been surprised by the response from the next generation or management team, so don’t assume anything! Would they be good stewards of the business or asset? And how would external influences play a role - spouses, a divorce, and even the impact of other advisors.
There are two schools of thought around whether it is best to bestow a business/asset onto a member of the next generation and simply provide cash to the other siblings, or whether to confer a majority ownership on one of the family with minority shares on the other siblings. To make this decision, a close understanding of the personalities involved as well as simulating how things can play out, all coupled with emotions, are significant issues to work through.
A well-considered shareholder agreement will be vital. Could that decision be turned on its head and the position considered from the point of view of what is best for the business/asset?
A variation on the theme is to introduce external management, so leave the shareholders as owners and key decision makers but have experienced external management to deal with the operational aspects.
Once the plan is established, communicating that plan effectively is critical, delivered in a way that does not disenfranchise other family members. Would that be best done by one of the senior generation or with the help of external advisors?
How far in advance should this be started? Our experience says that a good succession plan is a few years in the making, giving time for people to become comfortable with the changes and the roles they will step into. It is also important to understand the separate roles that everyone might play - being an owner is different from being a director, albeit interests can be aligned.
Succession is a minefield and needs careful planning and support from others who have successfully navigated the process and found an amicable solution for the family and their business interests.
About the Author - Mike Kane is a partner at Turcan Connell and wrote this article with Kirsty Ross, Director at Turcan Connell. Find out more about their work with family businesses at www.turcanconnell.com
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