Business: The generation game
Top tips on preparing the family business for the inevitable day when the issue of succession must be addressed. Niall Glynn reports.
Family businesses have, for decades, formed the backbone of the private sector in Ireland, with an estimated 125,000 businesses employing 350,000 people. And now, with Budget 2012 less than two months away, many family business owners will contemplate the possible transition of their businesses in light of potential increases in gift and inheritance taxes, coupled with potential reduction in tax reliefs for transition of businesses. Tax is, however, just one factor that may impact on an overall succession plan.
Further issues can include:
• family and business factors including preparedness of successors
• whether future management should be family or non-family members
• the nature of how any decisions around ownership are made
• the impact of any decisions on family relationships
• how any plan will interact from an overall governance perspective and in managing the family’s overall wealth
While business owners may be cognisant of the issues that may merit consideration, often the biggest obstacle is whether the owner is prepared to ‘let go’. While few family business owners will readily embrace the concept of their life outside of the family business or their loss of leadership of it, the reality is that letting go will occur one way or another. Some business leaders stay on until their 70s or 80s; with others the decision to let go is forced upon them by illness, divorce, bankruptcy or an unexpected death. For others, a more disciplined pro-business course is adopted, planning years ahead for an orderly transition while preparing themselves emotionally for life outside of the business. It is entirely the owner’s prerogative to hang on or to plan their exit. However, whichever path is chosen, the onus must be on ensuring the optimum chance of the business continuing successfully in the hands of the next generation.
Often what keeps a business owner from letting go is the need for security in a number of areas including:
• Family security: the fact that family will not act in a united basis if the business owner relinquishes their leadership position.
• Personal financial security: do the owner and their spouse have resources to live comfortably post-retirement?
• Psychological security: one of the biggest obstacles occurs where individuals need to identify who they are and what they will do when they absent themselves from the business.
• Organisational security: fear that the business cannot function properly without their involvement.
Financial security should be addressed over time through appropriate provision over a number of years rather than placing any significant burden on the business immediately prior to retirement. Organisational security, having appropriate structures and processes governing accountability, communication, planning and decision making – all are required.
These are to include appropriate financial controls, having an excellent management team, establishing, where appropriate, an outside board of directors and being aware of the skillsets required for the next CEO to assist you in determining/benchmarking who they may be. Family security and personal psychological security are two of the more difficult issues to address. Many family business parents find it difficult to face reality as it relates to their children. Ultimately, making difficult decisions may be required. For example, in deciding who should be successor, it may be a case of choosing one child over another or deciding that one child should not be involved in the business. These issues tend to be exacerbated where historically the business has been used to provide roles for family as opposed to being operated as a business where only those suitable were allowed join and participate.
Finally, while owners spend so many years totally involved with the business, nourishing it and taking pride in its development, it is essential that they separate their identity from that of the business.
Questions owners should ask themselves include:
• Why am I still ‘hanging on’?
• What am I working for?
• What are my goals?
• Am I reluctant to leave for reasons relating to the business and if so, why have I not been able to solve these problems earlier?
• Am I doing it for myself?
• Am I being honest with myself?
Letting go means relinquishing control, not only handing over the role as CEO but ultimately transferring the voting shares in the business to the next generation.
For those who find it difficult to do just this, I recommend that they clearly communicate their intentions in order to manage the family’s expectations; that they develop contingency plans in light of their stated intention to continue; that a successor development programme is still designed and put in place; that the organisation’s strategy, structure and management style is updated and kept relevant; and, finally, that an ownership transition plan is developed and clearly communicated to those who it will it impact upon.
The incumbent business owner’s attitude is key to the transition of a family business and can be a significant determinant in whether such a transition is successful or not. The process of letting go begins long before retirement and even before formal succession plans may be instigated. It is our experience that the most astute family business owners embrace the requirement to let go, the preparation it requires and the responsibility in ensuring a successful transition. They take extreme pleasure in knowing the business they have built will last successfully into the next generation.
Niall Glynn is a tax partner in Deloitte and the author of “Planning for Family Business Succession”. Visit www.deloitte.com/ie/succession-planning to order a copy of the book.