Making a success of succession planning

It’s important to define who is family, who will benefit, what provisions are made for family members who are not active in the business and what to do when conflicts arise in family businesses. 

For some a family governance plan is helpful to define how the family and the business interact:

• How does the family want to operate the business?
• Who in the family is involved in the business, in terms of ownership and in terms of management?
• How will family members not involved in the business be compensated? 

As a business owner, you have crucial decisions to make in terms of who your eventual beneficiaries will be. That includes how much compensation is paid or ownership will transfer to family members who are not involved in running the business.

You may also have to decide whether an external executive should be appointed to run the business and how to compensate and incentivise such leader as well as any key non-family members of management. 

Families change as births, deaths, marriages, and sometimes divorces happen. Tax and business rules and legislation can also change. The business itself could also evolve, including the assets and structure. Make sure to build flexibility into your success plan, including an agreed timeline for periodic reviews. 

Business owners should focus on developing an appropriate succession plan, ensuring they have or have access to the right skills to ensure effective implementation of that plan, manage the business, look after all stakeholders and nurture the next generation.

So what happens if you appoint an external successor? If an external successor is appointed, communication with family members and the senior management team is essential. Planning the transition is vital, as is involving the successor in all aspects of the company's operations and the company's governance. This will help them establish relationships with family members and the senior management team and better understand all parties' business, strategies, challenges and priorities. 

• Accept succession is inevitable, and change will happen. Your only choice is whether you make it happen or let it happen to you.
• Identify events that could trigger a transition, such as a retirement, and seize them as an opportunity to get started.
• Make sure all the main stakeholders are engaged in the process. 

• Reflect on the business, what has been successful and what you want to continue.
• Identify and test the feasibility of alternatives for the future.
• Communicate with all family members so it’s clear who wants to be actively involved in the business. If there is not already a family governance structure in place, agree if one is needed.

• Avoid prolonging the Exploration stage if it’s simply to avoid making a choice.
• Be practical and aim for an outcome that is ‘good enough’, rather than perfect.

• Create a plan covering what needs to be done by the business, the family, and the owners to ensure change happens.
• Identify every successor and document their exact roles and responsibilities.
• Create a timetable for the transition to help all the stakeholders stay on track.
• Design an announcement strategy to ensure that other key stakeholders know what is happening.

This includes being aware of the potential impact of:  

• Capital Gains Tax (CGT)
• Capital Acquisitions Tax (CAT)
• any relevant tax relief, such as Retirement Relief from CGT, which business owners may avail of when transferring a business to either a child or someone outside of the family and which is maximised if the transfer to a child takes place between 55 and 66, or Business Relief from CAT, which can reduce the taxable value of business property by 90%.  

If passing on your business will incur a tax liability, you’ll also need to consider ahead of time how this tax liability will be funded. A lot of wealth may be tied up within your business, which may make it difficult for those liable later on to access the funds they need to pay Revenue.