Succession is a multifaceted process that involves financial, emotional and strategic considerations. Mark Butler explores the critical aspects of ensuring the seamless transition of a business from one family member to another
Succession decisions in a family-owned business can either fortify its legacy or lead to its downfall.
Having navigated the challenges of Brexit and COVID-19, businesses are now focused on long-term planning and preparing for the unexpected.
In family-owned businesses, this includes succession planning, and getting the process right is crucial.
Early-stage conversations
The foundation of a successful succession plan is open and honest communication.
Family members, especially the current owner(s), should initiate conversations about their wishes and intentions for the business’s future early to mitigate misunderstandings and conflicts down the road.
By discussing their vision for the business, leaders can set expectations and ensure alignment among family members.
The next generation
Incorporating the next generation into the business as soon as practical is vital. This not only allows them to learn the ropes but also provides an opportunity to build the necessary skills and experience.
Mentorship and on-the-job training can help bridge the generation gap and sustain relationships with suppliers and clients to ensure a smooth transition.
Waiting until the last moment to involve successors can be risky, as it may leave them unprepared to take the reins. Owners should give the next generation every chance to learn while they are still there to assist.
Let go and step back
One of the most challenging aspects of managing succession is the emotional struggle to let go.
Founders and current owners often have a deep emotional attachment to the business they have built over the years. Knowing when to step back and relinquish control can be an emotional wrench.
Recognising that this is in the best interests of the business and the family’s future can help to make the transition smoother – but not necessarily easier for many.
Structure for business, not tax
Structuring the business appropriately can help to ensure its sustainability during and after succession.
While planning for tax efficiency is essential, it should not come at the expense of the business’s overall health. Business goals and the company’s best interests should always take precedence over tax planning.
Planning first and then executing tax-efficient strategies is more prudent than forcing the business into a tax-efficient mould.
Tax benefits, such as retirement relief, can help to minimise the costs of passing on the business, but they are there to help succession, not dictate it.
Family shareholder agreements
A robust family shareholder agreement is a cornerstone of successful succession planning.
This agreement outlines the rights and responsibilities of family members with a stake in the business and addresses issues such as shareholding percentages, decision-making processes, dispute resolution mechanisms and the roles of family members within the company.
A well-drafted agreement can prevent conflicts and provide a clear framework for the governance of the business.
Fairness vs. equal shareholdings
Fairness in succession does not always mean equal shareholdings for all. Each family member may have different skills, interests and levels of involvement in the business.
The primary goal should be to ensure the long-term sustainability and prosperity of the business. This may involve distributing shares based on merit, responsibilities and contributions rather than a one-size-fits-all approach.
Fairness should be synonymous with the best interests of the business and the family.
Secure the business’s legacy
Succession planning in a family-owned business is complex and delicate. It requires open communication, early involvement of the next generation, the courage to let go, proper business structuring, family shareholder agreements and a fair distribution of responsibilities and shares.
Some business families think their company and family issues are unique. Sometimes, they are correct, but advice from experienced advisors can help to structure a succession journey that starts long before the keys are handed over.
Succession should be viewed as an opportunity to secure the company’s legacy and foster growth, not merely as a financial transaction.
By prioritising these elements, family businesses can ensure a seamless transition that benefits the enterprise and the family it supports.
Mark Butler is Managing Partner at HLB Ireland
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