If you’ve watched the TV show Succession, you’ll know how fraught family businesses can be – especially when it comes to handing over the reins. From interest to expectation, aptitude to attitude, there is a lot to consider, both for the current CEO and the CEO-to-be.
A family affair
Where you are dealing with passing a business to more than one child, its future ownership and management are always key issues says Mairead Harbron, partner, PwC Private – who will manage it, who will own it and in what proportion?
“In smaller businesses, ownership and management may have been viewed as inseparable functions, whereas for larger businesses this need not be the case,” says Harbron. “The separation of such functions may in fact be critical to ensure that the business can succeed in the hands of the next generation.
“Other key issues are governance and strategic decisions on the future direction of the business. At their simplest, family governance policies should incorporate rules around conflict resolution such as voting rules – who can vote and what majorities must be reached, how deadlocks are resolved, payment-package structuring and minimum requirements to sit on the board, etc.”
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Seamless transitions
Organising the transition of your business’s leadership is one of the most pivotal decisions you will under take, says Camilla Cullinane, tax partner at KPMG.
“Findings from the recent KPMG Enterprise Barometer, which surveyed almost 200 of Ireland’s leading indigenous businesses and entrepreneurs, found that over two-fifths (42 per cent) have succession plans for replacing any member of the senior management team who may decide to leave the business,” says Cullinane.
“For a seamless leadership transition, succession planning should commence several years before the current leadership’s intended departure. Beginning this process in advance not only paves the way for identifying a suitable successor but also allows time to address legal, tax, financial, and operational considerations, offer training and align the successor’s competencies with the business’s vision.”
It gives business owners time, too, to manage family dynamics to facilitate a gradual transition, resolve conflicts, “and enhance the likelihood of a seamless succession process that strengthens the business’s foundation for the future”, she adds.
Fail to plan, plan to fail?
Arguably it is never too early to start succession planning and, indeed, business owners should always consider their exit strategy, says Damian Prendergast, director, private clients, Deloitte Ireland.
“That being said, I usually advise clients that their 50th birthday is the time when they need to start actively considering their business, personal wealth and corporate structures,” he adds. “Retirement relief from capital gains tax, which is a very attractive relief, particularly when transferring business assets from one generation to the next, applies to disposals after the age of 55 years. It is limited once you reach 66 so that period between 55 and 66 is very important from that perspective. Therefore, starting to put a plan or structure in place in advance of 55 is key.”
Other considerations include family circumstances – if one child is showing an interest and capacity for the business, then parents could consider, over time, introducing the child to board-level decision-making while retaining control with the parents, says Prendergast.
“This way the child will learn the distinction between working in the business rather than working on the business. If there are other family members that are not as actively included in the business, plans and strategies can be put in place to facilitate these children also.”
It is important to engage with family members to determine what role, if any, the next generation wants to have, the support needed to make sure successors are ready to take over and whether you should look at alternatives such as selling the business, says Harbron.
“This process should include speaking to people individually to let them express their views freely before bringing family members together to discuss findings, address areas of dissent and agree on the plan for the future,” she adds.
“A succession plan, like any business continuity initiative, shouldn’t be a static document. It should be revisited and updated as needed based on business or family circumstances. What will happen, for example, if a family member gets married or divorced? These are important questions to address in advance.”
Juggling responsibilities
When it comes to succession planning and accommodating the needs and ambitions of family members, transparent and open communication is critical, says Cullinane.
“Begin by understanding each family member’s individual aspirations, strengths, and interests,” she adds. “Assign roles based on competencies and passions, ensuring a harmonious alignment. For those uninterested in direct leadership roles, offer options for contributions that leverage their inherent strengths.
“For some, a family governance plan can help 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? Integrating a family governance plan can also serve as a catalyst for unbiased decision-making.”
As a business owner, you have crucial decisions to make in terms of who your eventual beneficiaries will be, continues Cullinane.
“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 a leader as well as any key non-family members of management.”
No clear successor
Where no family member is suited or interested, the parents could retain this role until such time as a suitable qualified external appointment is made, says Prendergast.
“This assumes that no family member can be introduced over time, with guidance and experience. This will also allow the parents time to consider their options for the future direction of the business so that an incoming CEO will be aligned to these values. There may also be internal non-family candidates within the business that can be nurtured and trained into the role. Ultimately these may provide the basis for a management buyout if that is the intention of the parents.
“Parents will generally want to provide for family members who are not interested in the business and this provision will depend usually on the dynamics of the family and the family wealth structure. Where there is no business wealth, it may be possible to provide for family members outside of the business in this way.”
Navigating tricky roads
When it comes to transitioning a family business, each case is different and a bespoke structure will always be needed, says Prendergast.
“Having said that, there is no substitute for planning and considering the various options, and this should be planned and thought out with the input of family members where possible and updated and revised over time as family and business circumstances change.
“Key considerations include bloodline provision (who can be owners of the company going forward); how to manage the potential exit of family members into the future; remuneration policies; and dispute-resolution mechanisms. At a minimum, shareholder agreements should be put in place as well as tax-efficient wills.”
Finally, and just as important as the above, Prendergast says, a tax plan needs to be put in place that will mirror the objectives and strategies so that the above is secured in as tax-efficient a manner as possible, availing of reliefs from Capital Gains Tax and Capital Acquisitions Tax.
Smooth sailing
Transparency, patience and a sense of humour are important attributes to bring to the succession planning process – a business succession plan often deals with sensitive issues, which can be emotional and hard to navigate, and as a result, tempting to avoid, says Harbron.