Succession Planning for the Family Business

15 September 2020 - Elizabeth Nichols

“Use a business plan to set concrete goals, responsibilities, and deadlines to guide your business. A good business plan assigns tasks to people or departments and sets milestones and deadlines for tracking implementation.” Global Strategy, Inc.

Which is fine until the truly unexpected comes along.  I wonder how many of us had “lock down due to global pandemic” at the top of our business risk list this time last year?

Many family businesses have shown extraordinary resilience in the last few months, seeking out new markets, adapting to shifting requirements and looking after their people.  It hasn’t left much time to look at longer term strategic issues such as succession.

Yet for some, now has been a good time to re-visit plans and to give some serious consideration to whether or not to step back and hand over the reins to the next generation.

First steps in succession planning: facing the facts
Having all the facts about a business’s financial history, products, markets and customers is crucial and when it comes to succession planning, it has never been more important to have clear and reliable information on which to base decisions. This information needs to be accurate: basic controls over debt collection, old stock and staff costs are even more important when it comes to evaluating business performance before any succession discussions begin.

It’s also the time to face up to any gremlins: if you know that beneath the surface there are old debts or maybe one of the directors or family members has been passing personal expenses through the business or drawing a bit too much cash out, then now is the time to tackle this. 

This is where an independent adviser can help with the transition to a new generation.  It is often a very difficult conversation for family members to have, but this is a good opportunity to put a stop to old customs which might have adverse tax consequences as well as being a hidden drain on cash. An independent financial adviser can act as a source of expert information and can also step in as an impartial mediator if required.

Thinking outside the box
Succession in a family business is rarely straightforward and almost always requires dealing with the conflicting needs and commitments of the next generation.  Even if family members are ready and trained to take over the business, without an outright sale the current generation may have no easy route to extract cash efficiently from the business to fund retirement.

A remuneration strategy is essential and should account for those who need to be compensated for working in the business and those who are rewarded for past work or investment through pension contributions or dividends.

Property can be a big issue, especially if rent is part of retirement plans.  Staying in premises which are not right for the way the business might operate in the future may not be a commercial option. If properties are within pension funds then there are many pitfalls, including tax penalties, if the business struggles to keep up with rent.

Often a management buyout has been the answer. However in the current economic climate, management may struggle to raise the funds or be more reluctant to have all their money on the line in such a period of uncertainty.

One idea which may suit this changing environment relates to Employee Share Ownership Trusts, where a significant proportion of shares are passed into a trust for the benefit of employees.  A capital gain is realised on the transfer of the shares into the trust, with a number of ways for the trust to finance the purchase of the shares, either immediately or on deferred terms. These trusts have been around in one form or another for many years, yet statistics indicate  that in the East of England there has to date been a lower take up than in other parts of the UK, yet they can provide solutions to many of the problems above.

Insuring against risk
Grim though it sounds, for everyone’s sake, re-visiting insurance needs is critical at the moment. With older generations more at risk than ever, keyman insurance and life policies can ensure that the business is not hamstrung for cash if a key family member dies or falls ill.  Cash to engage professional help in the business can be combined tax-effectively  with policies which will enable the buy-out of any shares left to a family member not working in the business, thus ensuring their future security without draining cash at a critical point of change.

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