The 3 keys to a good family business succession plan
If you fail to plan, you are planning to fail
“If you fail to plan, you are planning to fail” goes the famous quote by Benjamin Franklin, and how true it is, especially in terms of family business succession. Transitioning the firm between generations faces several unavoidable challenges, such as a change in leadership style and staff loyalty, so why not eliminate any unnecessary trials like a poorly planned succession?
Highlights
There are three main aspects to any good succession strategy:
- Management
- Ownership
- Taxes
Management versus ownership
Management and ownership are often one and the same, but not necessarily. You may, for instance, decide to give over management of the company to just one child – the one you feel is best equipped for the job – but to transfer equal shares of business ownership to all of your children.
A good suggestion to make these decisions without hurting feelings and causing family rifts is to discuss the plan long before you announce it and put it into effect. By opening up a dialogue early on with all the parties concerned, you can find out what everyone’s thoughts, ambitions and dreams are on the matter.
It may be worth noting at this point that a preoccupation with equality is not necessarily a virtue in succession planning; sometimes outgoing leaders need to get over the idea that everyone must receive an equal share of the business. Not only is such a strategy often not be in the best interests of the company – one child might show more talent and commitment than the others – but it may not even be what is wanted by the others. Again, by speaking openly with your children you’ll be able to ascertain if each has the same degree of interest in the business and hopes about their respective roles in its future.
Taxes
A forward-thinking family business leader adopts a taxation strategy that will help minimise the transfer costs upon his or her retirement or death. It’s about choosing the asset transfer tax that best suits your particular business. For instance, many choose to freeze the value of their interest in the company while ownership is being transferred to the child or children.
Specialist accountants and lawyers can offer invaluable guidance in this regard, as there is no blanket advice that can be given for all countries, industries and businesses. While few people feel comfortable talking about their own ageing and mortality, it is both the kind and prudent thing to address this matter early on, so we encourage you not to put off making that appointment and settling on the most appropriate taxation strategy.
Family business leaders are usually very much concerned with ensuring the family business continues to work towards the long-term welfare of their family. Having a sound succession plan in place well before it will come into play is key to this.