Keeping a family business in the family is usually an ideal situation. Passing over your hard-earned work to a loved one is an easy way to ensure the business will be kept in good hands and that your legacy can be upheld in the way you hope for. However, due to the emotion that is intertwined into both family and a family business, it can be difficult to think about a succession plan, let alone voicing the subject with those involved.
Some of the most difficult conversations to have include:
- pinpointing who will remain involved or become involved, who will not and the reason/s why;
- ascertaining the objectives of the next generation and ensuring they align with your own objectives for the business;
- how much involvement you will continue to have in the operations of the business and for how long; and
- how an asset (such as a farm) can be passed on to the younger generation without the older generation losing all of the wealth they have tied up in it.
So, what are the do’s and don’ts when planning the handover of the family business to the younger generation?
Keep your succession and estate plans separate
Handing over control of the business and the related assets does not have to happen concurrently. Succession planning involves transferring the ownership of the business by way of the older generation reducing their control at the same time the younger generation takes up more of it. Estate planning, on the other hand, relates to the transfer of assets and while your assets may be connected to the business, they should be dealt with separately.
Establish a time frame
There are two timing factors to consider when preparing the succession plan of your business.
Firstly, for your plan to have the greatest chance of success, the process should be started as early as possible to ensure it is completed thoroughly and that you have time to ease out some of the more uncomfortable aspects of the plan, such as the difficult conversations listed above.
The second time consideration relates to the time span over which your plan will take place. Will you hand over operations within the space of a year, or will you gradually relinquish control of parts of the business over ten years?
Set out your needs and objectives
Before setting the plan in stone, it is crucial that both you and your successors understand each other’s needs and objectives.
While you may have one idea in mind, it may not sit well with another family member, so while it can sometimes be uncomfortable to undertake discussions of this nature, it is imperative that every related party clearly vocalises their needs and objectives so they can be considered in relation to one another.
Identify the curveballs
There is no point in creating a plan if you don’t make room for things going wrong. When making your succession plan it is important to also factor in a contingency plan just in case issues such as death, divorce or a major falling out in the family occurs.
By identifying the curveballs up front, you won’t be surprised if and when they happen, and you will be able to adjust to ‘plan b’ with ease.
Formalise the agreement
Once you have set out the succession plan, it is vital that you formalise it as an agreement with the relevant parties. Again, it is difficult to think about the prospect of bad blood between your family but to be able to protect yourself from any potential pitfalls, a legally binding agreement should be formalised with a lawyer. Consider the agreement as you would any other contract you have entered into in the course of running your business.
When formalising any such agreement we recommend you seek advice from your financial and tax advisers to ensure that the agreement does not cause any adverse tax or accounting consequences.