Transitioning a business from one generation to the next is one of the more difficult things confronting a family business. There are not only the financial, legal and practical matters to consider but also the emotional issues that make the discussions much more difficult.
The 3 elements to successful transition are:
- Transitioning the management of the business;
- Transitioning the ownership of the business; and
- Determining the spread of ownership and management between family successors.
1. Preparation
Before embarking on any transition, it is important to have an appropriate corporate structure in place. The chances of a successful transition are greatly enhanced through a company structure with a shareholders agreement (if more than one shareholder). You need to see your lawyer and perhaps accountant in relation to this.
Sit down with your family members to work out a transition plan including:
- whether you will have ongoing involvement perhaps as chairman or consultant to the business;
- whether all members of the family be involved;
- division of shareholdings (ownership);
- will some members of the family be passive investors and not have any salary entitlements;
- who will do what jobs; and
- will everyone be paid the same if they are employees or according to their position.
In making these decisions it is important to have a very clear understanding of the roles that your successors play in the business. Consider whether they have been involved in the business over a period of time and gained a certain level of knowledge and if they will they need external advice.
Part of the planning process should start a number of years from the intended transition date. This will enable the successors to build their experience and expertise and their relationships with employees, customers and suppliers. During those preparation years you can evaluate the performance and gauge the relationship between the successors which will give some understanding as to whether the succession strategy will actually work. These practical matters are often the most important in any plan for succession.
2. Transferring legal ownership
This issue requires both legal and accounting/taxation advice together with careful thought on commercial and practical factors. Don’t be totally driven by taxation benefits.
On the assumption that there is a corporate structure in place, then shares in the business will be transferred to the successors. The issue of shares does not have to occur at any one point in time. You can issue shares over time so that the transition period is gradual, which can have some advantages going forward. If there is more than one successor (shareholder), it is strongly recommended a shareholders agreement is entered into between the successors to avoid conflict.
Shareholders agreements are relatively comprehensive documents that set out the rights of and relationship between the shareholders. They deal with issues such as decision-making and dealing with disputes, dividend distribution, selling and issuing further shares, structure of the board, management’s powers and limitations and so forth.
3. Checklist
- Plan the structure and develop the transition plan well before it is needed – start talking about it early;
- Try to make the transition gradual over a period of time;
- Make the decisions in relation to transition collectively but ensure you give guidance to your successors and have a very clear view yourself before you start the process;
- Obtain legal and accounting advice;
- Train your successors;
- Pay the successors in their employment roles, but reward them by dividends according to their share ownership;
- Be fair to all members of your family in terms of ownership, but not necessarily in terms of management or control of operational decisions;
- Ensure there are dispute resolution procedures;
- Enter into a Shareholders Agreement with all parties.
4. Some other practical advice
Ensure you have a plan and a fundamental understanding between all involved as to how the transition will occur.
Don’t make decisions about successors unless you are convinced that they not only want to succeed you in operating the business, but they have the ability to succeed you.
Take the time to train and encourage people and act as a mentor, don’t be too quick to let go of the reins of the business. However, let your successors have the influence they desire, even if it is different from that which you envisaged. It is usual that your successors will want to assert their own ideas and style in moving the business forward. You will have to let go at some point of time.
It is a fact that only around one-third of family businesses survive longer than five years post-transition. If you don’t plan and carefully implement the transition strategy, the chances of the transition surviving will be quite small.
This information is intended as a guide only. For further information, feel free to contact Leanne Scott of Scott Legal on 03 9111 0078.
