SUCCESSION PLANNING IN A FAMILY BUSINESS

Very many private companies and unincorporated businesses are controlled by a family. This leads to a unique set of challenges which are translated into either a strong business or a weak one. Experience has taught us that the family-owned business must actively address these challenges if it is to prosper and create added value for its owners.

The three recurring themes are:

(1) management succession

(2) wealth management

(3) exit planning

1. Management Succession

The biggest challenge often arises after a few generations of family management.

What action should be taken if the next generation do not wish to manage the business or cannot agree who has the ability and interest to do so?

In very many cases, the best solution is to recruit non-family managers well in advance of retirements. However, this approach often requires a number of recruitments. Otherwise, one non-family manager might feel isolated.

Offering family members senior positions as a "birth right" is not advisable as it can have a detrimental effect upon staff motivation and, indeed, damage the business.

2. Wealth Management

Many family businesses have generated significant wealth in the form of a net asset value which is beyond the needs of the business. Often their balance sheet contains property and other investments which are not required to operate the business.

This approach can jeopardise the owners' personal wealth as book values in a balance sheet are no assurance of future value. Moreover, individual owners/shareholders are not at liberty to access their share of this wealth.

The solution for many family businesses is to distribute retained profits (not required by the business) as dividends or other forms of distribution. Not only should the business survive without non-essential investments but the owners will not have to rely upon some future event to realise some wealth.

3. Exit Planning

There is no specific requirement to plan an exit from a business. However, in family businesses, there is a need to agree with the next generation what are the broad intentions.

The position is different when a family-owned business makes a commitment to non-family managers to offer the business for sale to them at some future date. In these circumstances, all of the consequences of relinquishing family control need to be assessed.

The most obvious difficulty is when not all of the family shareholders are prepared to sell. To avoid a 'deadlock' the best advice is to arrange for a legally-binding shareholders' agreement to be prepared now typically incorporating tag-along/drag-along terms to set the circumstances where all shareholders must agree to sell.