The HBO drama series "Succession" gives valuable insight into the dynamics of a family business. The hesitations displayed by Roy when deciding the future of the business are not unique, for many family businesses the decision on who shall succeed him is a frequent problem that can be detrimental to business performance in the long run.
What to consider when business owners reach the age of retirement?
First things first - what age should you retire? The first step is ensuring that as an owner you are ready mentally to step away from the ownership and management of the company. The only person who knows when the timing is right is the business owner themselves. Throughout the years we have seen clients be ready at 50 and ones who are 80 and will still continue to run their business.
Making the decision to hand over a family business is not only personal but critical. Coming to this decision will outline your own future and that of the business.
While tax implications will play on your mind, it's only a small part of the decision-making when it comes to your succession plan. With enough time and planning, we will identify what tax reliefs you are entitled to which will ensure your tax bill is minimised. For a succession plan to come to fruition, it can take years from developing the initial plan to transferring the business. It is important to bring your advisors on board early as with the right plan a business may be able to be transferred to children without any tax implications. It can also be possible for the parents to take out monies from the company, up to €750k tax-free or up to €1m at 10% tax.
Sometimes choosing a successor is easy, however, this can get complicated if, for example,there are several children but only one works in the business. Many would argue that the obvious choice is to transfer the company to the child working in the business. This can then lead to questions on how you can compensate the other children. There are a few different options at this point. All children can receive shares in the business, but this may lead to tensions with the working sibling. Another option would be to provide all children with shares to the value of the company until the day of transfer and the working childwill receive any additional value as they move forward with the company. If these options are not appealing there is also the possibility to ensure that the additional children receive a dividend allowing them to gain an income from the business if profits allow.
Alternatives to passing to next generation
If the next generation of the family has little interest in succeeding as the owner of the business, a sale, management buyout or hiring a general manager to run the business on your behalf must be considered.
A sale sometimes is the best option in certain circumstances, especially if the business is in a particular market where values have increased. In some cases, certain businesses may not be attractive to buyers. If you are unsure of the attractiveness of your business a good test would be to see can the business continue to survive and grow if the owner stepped away for a period. If the answer to this is yes, there is a good chance that someone will want to purchase your business.
Management buyouts are also a solution when a suitable successor cannot be identified. If there is a strong management team, then they will know the company inside out and know the value of the business. They will be working in the business and will know what it takes to make the business profitable. With this type of exit, it is essential that the management team source finance to purchase the business. Careful tax planning can help to find a solution.
If the decision is made to employ a general manager, the business owner would still be involved but not at the same level. If considering this option, you will need to think about giving the general manager an incentive to remain with the business, be that equity or bonuses based on profits.
Your role in the Business post transfer
Once you transfer the business, either by gift or sale, you no longer own the business or have a right to be on the business premises. Although this may seem obvious, it can sometimes be forgotten. Your child will now have the authority to make critical business decisions without your input. If the thought of this causes you concern – you may not be ready to hand over your business. In most cases making a clean exit benefit both the successor and employees. However, if you wish to stay on in the business in a reduced capacity, we will always recommend that you sign up to an employment agreement with the business. This will give you employee rights which may be important in the future to protect your income and your right to work, but also outlines your new role within the business so that roles do not get blurred.
It is important to ensure that selling your business is what you want. Once you make the transfer or sale there is no turning back. Don't be afraid to change your mind as you progress, what felt right 12 months ago may not be appropriate now. Open communication is always best as you do not want to face any situations that affect your personal relationships.
Every family is different, and every business is different. Just because it worked for another business does not mean it will work for your family. Do what you feel is right and not what other people want you to do.
If you want to discuss your succession options further, contact Dave O’Brien: email@example.com