Our Succession Planning Series – Part 1: The Not So New Buzzword?

July 3, 2018

Small business week has prompted us to once again consider what is important to businesses; and succession planning was near the top of the list.

Everyone will be telling you, you need a succession plan: your accountant; your bank; your solicitor; and even your children.  In this 4-part series of short bulletins, we will examine whether succession planning is important for family businesses, or is it just another buzzword.

While we will focus on family business succession planning, a lot of the concepts will be relevant for succession planning for non-family businesses.

What does ‘succession planning’ mean?

Succession describes the process of a business owner, whether they are a farmer, franchisee or food processor, transitioning out of their business with a new person taking over. The planning part is preparing for that transition.  There are many ways to exit a business, which is why planning ahead is vital to make sure the right action is taken at the right time to get the best result for all involved.

Is it just a buzzword?

Operating and growing a business takes hard work.  You have created a lot of wealth in your business, particularly capital intensive businesses such as primary production.  This makes it even more important that when it’s time for you to exit your business you receive a fair reward for your efforts, while still allowing the business to continue and grow if that’s your goal.  Succession planning helps you achieve this, so we believe it is more than just a buzzword.  It is vital for every business owner; particularly those who will be relying on their business to fund their retirement.

Succession planning allows you to minimise tax and stamp duty costs (which can sometimes seem prohibitive), provide future financial security for you and ensure the exit is as smooth as possible for you, your family and the business.

What are the exit options?

Depending on the business, there are any number of ways for you to exit your business. The more common ones include:

• Sale: You sell the business and receive a lump sum payment.
• Merge: While allowing a lump sum payment like a sale, merging with a similar business may reduce disruption and offer additional value to those still involved in the business through the increased economies of scale or productivity.
• Interfamily transfer: Often a family business is more than just a business.  It may be a home or a place where important life and business lessons were learnt.  Retaining family ownership in these businesses is generally very important for the owners.  Succession planning is even more vital for these types of business, to help balance the competing needs of the family members exiting the business, those entering the business and those not involved in the business.
• Other alternatives: Include a buyout by those involved in the business who are not necessarily family; or simply shutting the business down.

If you fail to plan, you are planning to fail

After spending years, or even decades, growing a successful business, you do not want to destroy that business as part of your exit.  While not having a succession plan does not guarantee failure, there are certainly risks that business owners without a plan may face, such as:

• Discovering that you cannot pass the business on to your family.  We see this as a growing problem for many business owners who aspire to pass it on to their children.  The difficulties you may face here include: not being able to afford to just hand the business over; the next generation cannot afford to buy you out; or the next generation simply has no interest in taking on the business.
• Being forced to delay retirement to generate sufficient wealth outside the business to enable you to retire.
• Accepting a lower price for the business and/or its assets than what they are worth.
• Limiting the number of purchasers that the business may otherwise have attracted.

Considering all of this, it becomes pretty clear that succession planning is important, it’s not just another buzzword.

If you would like to discuss any of the issues raised in our succession planning bulletin please contact our office on 07 46716 000.

In our next bulletins, we will look at the ‘when’, ‘who’ and ‘what’ of succession planning. Click here to read more.