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18 March 2014

Successful Succession Planning

Posted By: AIB Business
Succession-Planning-275-275

While many people have successfully set up and run their business for years, few have mastered the art of knowing when the time is right to sell the business or, indeed, ensure that it can survive the absence of the original founding owner.

Without succession planning, a business that has become successful can just as easily fail. The passing of the baton from one generation to the next is often clouded by the family and stakeholders’ differing views and agendas, as well as emotion! Without proper planning, the clashes of views and agendas can pull the business in several directions, which may destroy an otherwise viable business.

 

 

With so much at stake, succession planning has to be a business priority and should be part of every business plan. There are two main options available:

1.         Retention Planning: Retention of the business within the family circle.

2.         Buy-sell Planning: Selling of the establishment to other business owners, key employees or interested outsiders.

 

Succession Plan

Planning the succession of a business is no different than any other type of planning in a business. The first step is for the business to have a formal plan in place. 

A plan should consider some of the following:

·        the options available regarding the business transference

·        the impact on the business/family

·        placing a value on the business

·        the timescale for the transition to the new ownership

·        the details in regard to the purchase/sale of the business

·        wealth management

·        taxation and legal considerations

·        a process for dealing with any disputes.

 

Retention Planning and Buy-sell Planning

In retention planning, special consideration must be given to the family – are family members interested/willing to work in the business and who are the family members with the ability and skills to run the business? 

There are many issues that uproot when one child is chosen over another. Factors that should be taken into account when choosing a successor include people skills, commitment, professional education and track record. Many owner-managers delay their choice as they worry about future shareholdings in the event of marital problems on the part of the successor or other siblings. 

When selling a business, it is important that general information about the business such as the company’s history, financial statements, competitors, market share, key customers and contacts is obtained, as this can assist in the buying decision process. It must be borne in mind that key information is often not documented or is not immediately identifiable, for example, the departing owner may be in possession of information relevant to the planning and preparation process such as knowledge of products or competitors.

 

Time

Time is a critical element of successful succession. Developing and implementing a succession plan is a significant project and should never be left until the last minute –  many aspects will require time to implement or to allow a smooth transition to the new owners.

Financial peace of mind is a crucial ingredient in a successful retirement of the owner or transfer of the business.  Financial planning for the business will have a direct affect on any estate. Careful consideration should be given to the estate and gift taxes associated with transferring a business interest to family members. A financial professional would be instrumental in defining these pitfalls and helping minimise the possible transfer headaches.

 

Engaging Professional Expertise

Family businesses need to have legal issues addressed by professionals. It may be just paperwork, but documents like shareholders’ agreements are key to avoiding confusion that can destroy family businesses experiencing succession.

A succession plan must also deal with the issue of the death or sudden illness of the business owner. By proper planning, anxieties surrounding income and security for surviving family members and employees can be minimised. In this regard, a will is vital. If carefully drafted, it will ensure that assets/possessions are transferred to the intended beneficiaries. It is also important that, having prepared the will, it is maintained and kept current.

It is estimated that nine out of ten Irish small businesses are family-owned and, with such a high proportion of the Irish business community populated by family-run businesses, it is important for the well being of the economy that the owners of these businesses have the ability to successfully manage the issue of transference. Owner-managers need to consider all the issues at the earliest possible time, and then select and implement the appropriate succession plan at the right time to obtain the best result. Engagement in planning at an early stage will allow for a successful succession.

 

Written by: Aviné McNally, Assistant Director, Small Firms Association

 

Do you require advice on Succession Planning?

AIB Corporate Finance (AIBCF) is AIB’s independent corporate advisory arm and a leading corporate finance house in the Irish market.  AIBCF advises clients in relation to both retention planning and buy-sell planning. Services include valuation, transaction structuring, project management of legal and tax advisers and management of the disposal process e.g. sourcing appropriate acquirers, negotiation of commercial terms, etc. For further information, please call +353 1 6419320 or emailcorporate.finance@aib.ie.

 

See Also:

Succesfully Selling your business

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