Succession planning for your family business may be one of the most challenging experiences facing anyone, especially a business person who has built a family business from scratch, so it is crucial to get right. Good succession planning can be the first step in maintaining the strength of a family business and preserving the legacy for the next generation.
Discussing how a family business should continue beyond the career, or even the life, of the founder can be difficult, as it often crosses business and personal spheres.
Know what the family business needs
Seventy percent of family businesses fail or sell before the second generation takes over.
Ninety percent of family businesses fail or sell before the third generation takes over.
Many family business owners assume succession planning centres on who will run the business when they step down, but a broader perspective is necessary.
For example, family members may assume they are in line to take on a leadership position when the founder dies, but it is important to educate them that business needs must be met with the right skills and perspectives. This requires balancing what the business needs with the aspirations of the family members. Rather than leaving nasty surprises in your will, the best way to prepare family members is to communicate often about how you see the family business thriving after you’re gone.
Creating a model that will help their family business survive after them is one big challenge that founders have to wrestle with. Besides having to deal with competitive pressures, changing technologies and business models, a family business also has to contend with rivalries between family members who hold large stakes or key management positions. Unless families address these challenges, they cannot expect the business built by the patriarch to survive after him.
Passing control to the next generation
The founder of the family business could be in his mid- or late-seventies, the next generation could be in the mid-fifties, and the third generation could be in the mid-twenties. Despite his or her advanced age, the founder is unwilling to relinquish control. This can be quite frustrating for the next generations, who may feel that they have a greater awareness of how the business landscape and technology is changing. They may want to bring about a radical overhaul of the business or can see a disruption to the business looming.
Personal aspirations, biases and lack of clarity of roles: When family members participate in a business, personal issues and personality clashes often play a big part in making the situation murky. Family squabbles sometimes spill over into the business domain.
You might want to think about establishing a family business plan or constitution. This includes putting in place a set of policies, processes and rules for family members. Business families should have intra-family shareholders’ agreement to mitigate ownership and management conflicts. They need to put down in writing exit polices, right of first refusal, voting rights, and so on.
The business plan or constitution serves two functions:
- It acts as a governing document that promotes ongoing family business continuity. This means establishing an initial plan as well as identifying fall-back plans and means of settling conflicts or making difficult decisions; and
- It defines and emphasises family values. You must make clear your family values in concrete terms so that everyone — family, non-family employees and directors, and customers — knows what you believe and how you conduct your business.
Ownership Transfer Issues
After a family business owner passes on, those left behind are often left scrambling to make decisions about daily operations. Good estate planning doesn’t just address ownership transfer, but can also help coordinate the day-to-day management and operations of the company after the owner’s death.
For best results, your estate planning should include details on dealing with directors, consultants and shareholders outside the family, as well as a plan that addresses the business’ key employees. Additionally, it’s important to specify who will be running the business if this person is different from the individual who ends up owning it. Taking the above steps before a death will help protect the legacy of the business for years to come.
If you’re the sole owner of your family business, you can create an estate plan that details the transfer of ownership and managerial power to your next of kin. The situation becomes more complicated for family businesses with multiple owners. In these cases, consulting the shareholder or partnership agreement is crucial. Not only does this document dictate who can and cannot acquire shares after a current owner passes on, but it may also prevent spouses and children from becoming owners by requiring surviving shareholders to buy out the deceased member’s portion of the business.
Tax Considerations
If you’re like most family business owners, then the odds are good that a majority of your wealth is tied up in the company you operate. Hence, it’s important to take steps to protect your loved ones from unnecessary tax payments when you’re gone. Good estate planning will ensure that the tax payable upon your death is minimised.
Key Documents for Estate Planning
Detailed legal documents are crucial for protecting your family business after a death. While you may assume that a will would be sufficient to protect your business interests, a will is not the only crucial estate planning document. A testamentary discretionary trust may afford you stronger protections. Whereas a will is a document that coordinates the division of your property after your death, a testamentary discretionary trust offers you greater flexibility, tax minimisation and asset protection.
For assistance with family business estate planning, please contact our experienced and friendly team today. We offer a free, 10-minute phone consultation.