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Succession planning

Published: 01 August 2017
Area of Law: Family Business

What happens when your last succession hope decides he or she wants a career change?

Divorce is difficult for any family but when the family is involved in running a business together it becomes all the more challenging. As individuals re-marry and re-evaluate their position within the business, it causes a significant headache for succession planning for the next generation.

Finding out their preferred choice of successor would prefer to step back from the family business when owners are planning for retirement is a tough decision to accept. If they cannot be persuaded to change their mind, and no other family members are volunteering to step into their shoes, the business owner could feel trapped with no where to turn.

They do have options, however. An external expert, with the relevant sector or management expertise, could be brought in to support the day-to-day running of the business until it becomes appropriate for them to eventually take up the reins. This option is likely to be made more attractive to external hires by incentives in the form of a competitive salary and share ownership.

If there is no obvious path for succession, another option for the business owner is to sell all or part of the business. This could be an attractive option if the owner is able to retail some intellectual property rights which would result in future income generated from royalty payments. Transitioning the company to employee ownership could be a favourable option to continue and maintain the culture of the business with committed employees. This option could also enable the business owner to realise value in a tax-efficient way.

Stepping down from the operational side of the business doesn’t mean the business owner has to sell or part with all of the assets. The ownership of the business can be transferred to the existing management team while any property can be retained as a long-term family investment.

Regular communication with potential successors is essential for business owners when preparing to exit the business. Owners need to have full transparency of a change in circumstance, such as a birth, marriage or divorce, which may affect their decision to take over the business. Being informed of these situations in advance gives the business owner sufficient time to intervene if necessary.

To minimise the risk these disruptions may cause to their exit strategy, business owners should look to tie in family members and other highly-valued managers. One of the best ways to do this is to motivate them with a competitive remuneration package to include an option to assume ownership of a stake in the business or to assume control of part of the business, once key targets are met. To protect any existing assets, the business owner can structure incentives so the employee only gets a share of any additional wealth. A document defining roles and responsibilities of individual family members ideally should be reviewed and discussed on a regular basis so everyone involved feels part of the decision-making progress. The management team can be bolstered by bringing in a “business mentor” or non-executive director.

It is usual for business owners to want to keep the business in the family, regardless of whether other family members want a role in taking the business forward or whether it is making a profit. When faced with succession planning, business owners should take a step back and think about what they really want to achieve. If the main goal is generated future wealth then selling the business or transferring ownership could be the best approach.

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