Business owners who have invested a lot of time and money growing may strongly feel the need to retain ownership of the business within the family when they exit.
If you are looking at handing over the reins of your business to a relative, either by gifting it or selling it, you must consider the impact it would have on both your business and your family.
Selecting a successor in the family
What’s best for the future of the business should always be given top priority when choosing a family successor. While you may wish to secure your children’s future by leaving them the business, it could create problems if they don’t really want to take responsibility for it. You must choose a successor that possesses both the required skills and dedication to lead the business forward. Don’t let emotion rule your decision. You can benefit from creating a board of non-relatives to gain an impartial opinion.
Problems could arise when picking a successor. Naming just a single successor may create disputes if other family members are also interested in heading the business. Alternatively, naming more than one successor could bring about disputes because there is no obvious leader. Major problems could also arise if the successor(s) fail to come to an agreement on how the company should be run.
Ideally, the role of successor should be earned, not just inherited. To find out how suitable and committed a potential successor(s) is, set up a trial period during which they would be assigned to work in all areas of the business.
Ownership and management
The method of transferring both ownership and management is a major consideration in family succession planning. Use the following questions as a guide when planning family succession:
- Will both ownership and management be handed over to relatives?
- Will the business be equally owned by the family members?
- Will non-family members be given management roles?
- Do you have to modify the goals and long-term targets of the business?
- What method do you use to quantify the success or performance of the business?
- Who are the family members who will take active participation in the business? What are their duties and responsibilities?
- Will there be relatives who will take non-active ownership?
- Is training or mentoring needed by your successor?
- Do you wish to take on an adviser role after you hand over ownership of your business?
Financial and legal matters
Consider the legal and financial impact of family succession and add these in your succession plan:
- How are you transferring the business to your family: by gifting it or selling it?
- Is creating a trust required as part of the succession? There are tax implications when you set up a family trust to own and run the business on behalf of your children.
- Will you get the business’ market value if you are selling it to a relative? Make sure you are rewarded justly for all the work you have done for the business and avoid financial disagreements by obtaining a professional valuation.
- Which would you prefer: receive a regular dividend from the business or get a lump sum?
Before selling all or part of your business, make sure to obtain professional legal and financial guidance.
Communication and dispute resolution
An important aspect of family succession planning is open communication. Both family and key staff should be included in any decision-making associated with the future management and ownership of the business. Their views and opinions are important. Look over the plans regularly with relatives to ensure they are up to date and content with the progress.
Having a process for resolving disagreements is also essential. Emotion cannot be totally eliminated in family businesses. So it is a good move to get an objective opinion from a trusted third party such as a lawyer, accountant or family business adviser.
Get help when taking on a family succession process for your business. PJS Accountants offer a host of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. We have been dealing with local businesses in Capalaba, Cleveland and the Redlands for over 30 years. Our team is always available to take your call and help with your business needs. For enquiries, contact PJS Accountants.