Implementing a successful succession is critical for business owners, writes Colin O'Brien, but careful planning is required

The problem faced by King Lear was similar to the one faced by business owners in the present - how best to organise and implement a succession. Lear got it very wrong, but his errors show how to get it right.

• First error: no plan

Despite being aware, as all monarchs should be, that a succession would have to take place, Lear did not work out any sort of plan for the inevitable.

For the owner of a business it is arguable that not one but two plans need to be put in place. The first should cater for the long-term future of the company. It should identify the next managing director or chief executive officer as well as factoring in any change in ownership.

The second plan should cater for emergencies.

If the owner/manager is unable to continue working, a short-term solution to running the company should be prepared. It is important not to assume that the long-term replacement will also be the stand-in.

They may not yet have the required skills and knowledge.

Unfortunately, the profile typical of a successful business person is one whose assets tend to consist of their private residence and their business. Too often, they have few other assets.

One consequence of this is that the business person and their spouse may have to continue to look to the business for support after they retire. The legal rights of a surviving spouse at death may require that a substantial stake in the business be transferred to them regardless of their capacity to manage, and regardless of any possible remarriage plans.

In the same way, the rights (enforceable in law) of children who do not enter the business - to be properly provided for from their parents' estate - may find no means of satisfaction other than from the business.

It is not always satisfactory to have a business owned jointly by several children, in the second generation. Siblings do not always get along, especially where business is concerned. By the time a third generation has arrived, ownership of the business can be diluted, and to some extent could possibly be in the hands of in-laws, etc. Relationships can become quite fraught.

It takes careful planning and good structuring to successfully manage any of the solutions to this problem.

One solution can lie along the lines of extracting assets out of the business so as to provide a share for some of the children, and for the retiring owners.

Another solution may involve introduction of professional management so as to remove personality issues, where the business is owned by several family members but only some are involved in management.

Where several family members are going to be involved in the business, it becomes important to develop a formal structure for the business, with proper decision-making processes, and the involvement of non-executive directors, or long-term non-family advisors who can ensure that personality issues do not intrude into business matters.

• Second error: no adviser(s)

Lear also either avoided or ignored the advice he was given in this area. Granted, most of this was coming from his Fool, but often this was the role of jesters; to offer advice and criticism couched in humorous language.

For owner/ managers succession planning is often seen as a long-term and long-finger issue. If so, it is important that they have somebody to remind them of these issues.

While the owner/manager does worry about the issues, it is equally important that there is an adviser to whom he can turn who is acquainted with the family, acquainted with the business and knowledgeable about the problems and solutions in this area.

While taxation and legal issues were not a problem for King Lear (he being in the fortunate position of being able to change these rules as he pleased), the same situation does not apply to owner/managers. Professional advice is usually the only way to solve these issues.

Take, for example, the process of transferring the company's assets.

A lifetime transfer of business assets from one generation to another can be costly with capital gains tax and capital acquisitions tax.

There are hugely valuable tax reliefs available to help in the transfer of business assets, but they require long-term planning to make proper use of them.

The reliefs that are available when making provision for family members other than through business assets are much less valuable but proper planning can help considerably to reduce the costs (and give greater flexibility) in this area also. But again, long-term planning is the key. Instant solutions are often not available at the last moment.

• Third error: no award criteria

When King Lear decided to choose a successor he had not worked out a sensible method of choosing them. No consideration was given to the skills needed or the challenges to be faced. So, he plumped for a flattery competition.

Owner/managers need to have a cold, hard look at the company they are running and the set of skills and aptitudes they would like to see in an ideal successor. Then they need to have a very cold, hard look at the options available to them.

Depending on the business, and on family personalities, it may or may not be the right solution to groom one or more children to enter the business, and to be the potential successors as owner/managers. It can be unfair to the selected offspring to restrict their choice of career. Not all offspring and parents have the ability to work together harmoniously.

In some situations, the right solution may be to develop a professional management within the business, which would be able to take over in the event of an unexpected death of the owner/ manager, and would take the pressure off the family to become involved.

In other cases, the identity of the ideal successor may be quite obvious, but the parents will be particularly conscious of the need to be fair to the other children, and to make adequate provision for them.

Parents sometimes seek to avoid a decision in these matters by resorting to a will in discretionary trust form.

However, that course of action leaves the problem to their trustees!

Unfortunately, discretionary trusts now attract serious capital acquisition tax liabilities and are an expensive solution, except where at least some of the children are under 21 years.

There is no single solution. The personalities of particular families, including those who have married into the family; the nature of the business and the nature of non-business assets in the family; and the personalities of the founder owners will point to a different solution at different stages of a family's life and history.

What is important is that the problem be addressed and that the decisions should be made with the help of informed, but objective, advisers.

Colin O'Brien is a tax partner at KPMG Private Irish Business