November 1st 2017

Good Succession Planning for family businesses is vital.
Kevin Crowford, Partner at JRW
Succession Planning expert Kevin Crowford looks at why more than 70% of family owned businesses do not survive the transition from founder to second generation and advises that a good succession plan will ease the process and overcome the common obstacles.

People are now living longer than ever before, which means that they are working longer too. In fact, there are more than a million employees over the age of 65 in the UK, with a quarter of Britons now expecting to work into their seventies.

Since the Government scrapped the default retirement age in 2011, retirement has become an increasingly subjective issue which varies considerably from individual to individual and from business to business. And it is true to say that many older people, who enjoy what they do and are deeply committed to their companies, don’t want to stop working, they just want a bit more leisure time!

Succession Planning for family businesses
But when it comes to family owned businesses, succession planning is an absolute priority and something that should be planned for well in advance.

Of course, there does come a time when everyone wants to retire, but if you own a family business you will know that this isn’t just a case of deciding not to go into work anymore. Apart from ensuring that you have enough money to retire on, the whole question of what happens to your business after you retire becomes of paramount importance and there are many factors that need to be addressed such as:

Who is going to manage the business when you no longer work the business?
How will ownership be transferred?
If succession is not an option the business will need to be wound up or sold?
What is your business worth?

However, If the business is going to be carried on by relatives then it is important to have a business succession plan in place to manage these issues, ensuring a smooth transition between you and the future owners of your business. With family businesses, succession planning can be especially complicated because of the family relationships and emotions that are involved and because most people are understandably uncomfortable discussing aging, death and their financial affairs with their loved ones.

This is probably why more than 70% of family owned businesses do not survive the transition from founder to second generation. In most cases, the combination of taxes and discord within the family are the prime reasons why a business does not survive, both issues that a good family business succession plan would cover.

If you have been putting off succession planning, then the following tips can help you to get the process underway for you and ultimately ensure a smoother transition from one generation to the next.

Start early
When it comes to making a succession plan for your business, five years in advance is good but ten years in advance is better. The key point is that the longer time you have to spend on succession planning, then the smoother the transition process is likely to be.

Involve your family in discussions
Making your own succession plan and then simply announcing it to the family is the surest way to grow discord and unhappiness within the family. By opening a dialogue amongst family members is the best way to begin the process of a successful succession plan, where close attention is paid to the feelings, ambitions and goals of everyone concerned.

Be honest and realistic
You may have always wanted your eldest child to run the family business, but do they have the business skills or even the interest to take it on? Perhaps there’s another family member who is more qualified and indeed interested to run the business. Or it may even be that there are no family members capable of/or interested in continuing the business and that it would be a better option to sell it.

You must look at your family realistically and examine the strengths of all possible successors as objectively as possible and decide based on what is best for the business.

Everyone does not need to have an equal share
Whilst in theory it would be a lovely idea for everyone to have an equal share of the business, the truth is that this may not be in the best interests of your business. It is important to remember that management and ownership are quite separate succession planning issues for your business. It may be fairer for the successor(s) who will be running the business to have a larger share of business ownership than family members who do not have an active role in the business. Another alternative is to use voting and non-voting shares so that only some of the family shareholders can make decisions on company policy, or you could transfer both management and ownership to your chosen successor and make separate financial arrangements for your other children.

Train and work with your successor(s)
You can’t really expect your successor to take over and run your business successfully if you haven’t spent any time training them. Your succession plan will be much more effective if you have worked with your successor(s) for a year or two before you hand over the reins to them. For single entrepreneurs, sharing decision making and teaching business skills to someone else can be difficult, but it is worth making the effort to do so for the sake of the business.

Get outside help
If you want to pass your family business along to the next generation, putting off business succession planning is the worst thing that you can do. A good succession plan will ensure that you have the funds that you need to retire and the business that you have worked hard to build will continue to thrive in the hands of the next generation.

JRW have the experience and expertise to put together a successful succession plan for you and we can facilitate the process of working through both family and succession plan issues with you. One of the biggest challenges with succession planning is the difficulty many people have in letting go, especially if they’ve started the business themselves and see it as their ‘baby’. Using an external consultant to objectively approach issues can be extremely valuable, emotions can run high and this in turn can cloud judgement, making it hard to focus on passing on knowledge and expertise, so an objective third party can help to keep these feelings out of the planning process.

We have worked with many family businesses about succession planning over the years and whilst a straight generational handover can represent the ideal succession, it’s very rarely that simple. Business owners do need to understand that their children may have other interests and ambitions. Once again, honest conversations as early as possible are absolutely vital.

If you are the owner of a family owned business, we hope that this article has provided you with some useful advice and indeed food for thought. Ultimately you really should give succession planning the time that it deserves, it is a complex area and if this is an issue that affects you then please do not hesitate to contact me for an initial chat.   

JRW Chartered accountants in Edinburgh, Galashiels, Hawick, Langholm and Peebles.
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