STARTING and growing a family business usually involves a fair amount of sweat and sacrifice.
Yet many business owners who have spent years building successful businesses find themselves unprepared when the time comes to hand over the reins.
Many business owners wish that their business will continue to be nurtured by a member of their family.
To achieve this it is imperative that there is a plan in place, as early on as possible.
Only about 12% of family businesses survive to a third generation, although this low percentage is not just down to the challenges associated with succession planning – it is sometimes because many family business owners choose to sell their businesses where there is either no family successor who is interested, or because an exit is needed to fund retirement.
There can be many obstacles to family succession planning. The most common difficulties are:-
- Finding a suitable successor. Are any of the next generation interested in the business? Are they capable of running the business? What training and experience will they need and how will they obtain both?
- If the family values lean towards achieving equality it can be harder to select who should be the next leader. What’s more, the family business may have considerable value. If this is to be passed only to those children that are interested in/capable of taking on the business, how will those that are not involved in the business be financially provided for?
- Is the business being passed on in the owner’s lifetime? Many family businesses are not big enough to provide for the financial needs for two generations simultaneously. Retirement planning must be considered and started many years before succession. There are also tax implications to consider. All transfers of assets within the business owner’s lifetime are potentially subject to two taxes – capital gains tax (CGT) and inheritance tax (IHT).
- Is it family first or business first? The founder, having created and built a business, may face psychological challenges to handing over the reins. Business owners often become entrepreneurs because of their wish to be “in charge”. Giving that up is not easy. There can family tensions involved. Parents may have to decide which of their children is the best leader, who should control and own the business, and how remuneration be determined.
It is important for families in business to have the required support network in place so they can be guided through the succession planning process.
The best advisers will have experience responding to challenges specific to family businesses, who can remain objective throughout.
Unfortunately we cannot avoid death and taxes, however with the right planning, you can minimise the tax implications, and pass on a successful business to your loved ones as efficiently as possible.
Sound planning, undertaken early on, should ensure you make well-considered and fair decisions, allowing you to leave a legacy to be proud of.