Business succession from one generation to the next doesn’t have to be a drama, although like the hit TV series, family relationships often complicate matters.
For advisors like me, succession typically starts with understanding the family dynamic and asking four key questions:
- What the current owners want for the business
- What they need financially for the future
- What the potential recipients of the business want and;
- Their ability to achieve success.
Where a business will pass to the next generation in a family it is important to remember that every family is different and family relationships can change in an instant. Over the years I have advised business owners on succession and here are a few examples of the key issues.
What is the business?
Sometimes it isn’t clear cut, so I need to work with the owners to establish what the business is, if it has a future without the current owner/s and then work with them to ensure a smooth transition.
A client of mine who is a serial entrepreneur recently asked me to help his business transition to the next generation. When we sat down to look at what the business consisted of, it became clear it is actually three different profitable activities. His two adult daughters who are both actively involved each have very different skill sets and approach to working. We have therefore successfully split the business whilst ensuring the client received the income he required and factored in inheritance tax and financial planning advice at the same time.
Sibling rivalry
Another recent example is a successful family business which was established by a couple and over the years, each of their three children have been involved in the business. Sadly, over the years, the business has outlasted the sibling’s relationship, so we worked with the parents to split it into different companies for each of the children which share an umbrella operating system. The transaction has been structured so that the assets must be retained in the family ownership for a period of time so as not to damage the core operations, gives the siblings autonomy over their areas of the business and mum and dad received the income and separation from the business that they needed to enjoy their retirement.
External expertise
Some owners decide that when the business transfers into new ownership, they need to bring in a board member and/ or more non-family board members to help take the emotion out of running it. Alternatively they may wish to bring in specialist expertise which none of the current directors have. Our Virtual Finance team offer a Virtual Finance Director service, more information can be found here.
Independent board members can help to avoid flashpoints during the succession process. Sometimes siblings argue just like the Roy family in the hit TV show and resentment for each other can have been brewing for years which spills out into the boardroom. It is important to remember that everyone can have very different views on running a business therefore a third party can make sure decisions are made for the right reasons.
‘Is blood thicker than water?’
It is worth noting that with some family businesses, a family member may be in a senior role because of who they are, rather than what skills they bring. Where they are ‘parachuted’ into roles they are not suitable for it can have a very damaging effect on the business and the morale of staff.
One family business I’ve advised (and I admire) demonstrated smart long-term thinking in their succession planning as one of the children pursued a career outside of it in corporate law, so that he would have the required skills to return to navigate the transition to the next generation and to run the business in the future.
’Outsiders’
My final thought is that no matter how good family relationships start off, they can always go wrong, so it is important to take advice and plan for all outcomes. Sometimes it is worth considering the worst case scenario where there are children’s partners involved in the running or ownership of the business. If this all goes wrong, the family ownership may become fragmented or even have to be partly sold which is a situation I have seen before. Careful planning and foresight is needed to ensure the business is not damaged as a result of marital breakup.
My next article on succession looks at some of the financial issues around business succession. For expert guidance on succession, contact Jacqui Gudgion or a member of the Mercer & Hole team today.
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