When planning for a new era, Con Casey from Smith & Williamson outlines ways to manage succession smoothly.
The tax costs and implications of succession planning is one of the most concerning issues facing Irish family-run businesses, according to Smith & Williamson’s recent Family Business Sentiment Report 2021.
The report, which was carried out in partnership with the Family Business Network, highlights that family businesses face a need to sell parts of their business when next-generation management seek to become involved as owners.
“With 80pc of family businesses indicating that they will create new jobs in the next 12 months, succession planning has never been so important, not just for those businesses but for the future of the Irish economy”
It is estimated that just one in three family businesses successfully make the transition to the next generation (Harvard Business Review).
Our report reveals that succession is the single biggest concern for business-owning families. It is not surprising as leadership transitions can be problematic, laden with emotion and potential conflict in some families.
So, it is vitally important for family businesses who intend on intergenerational handover to start planning this process early.
With 80pc of family businesses indicating that they will create new jobs in the next 12 months, succession planning has never been so important, not just for those businesses but for the future of the Irish economy. This is why we’ve developed a succession and family business step plan to help family businesses navigate through the key areas of intergenerational planning for future handovers.
Step 1. Set your objectives
This is where you will determine if there will be continued family involvement or if there is a need to bring in external or non-family management. The family will identify the goals for the next generation of leadership and develop a vision and set of objectives for the business. You may at this point need to talk to trusted professional advisors, to provide council and guidance.
Step 2. Establish a decision-making framework
It is vital that the plan is written down and communicated to stakeholders and family members.
We solidly recommend consultation with the key stakeholders to ensure all perspectives are considered and everyone is part of the decision-making process. You should agree on a method for dispute resolution to ensure disagreements do not derail the process. A family charter can often provide the necessary structure for this.
Step 3. Identify successors
This can be a difficult process and particularly difficult to get perspective on. There is a real need to identify those within the business or indeed new external hires who are possible candidates and who can bring the business forward successfully. We recommend developing a programme of mentoring, training, and development, and importantly to have a structured process for ranking successor suitability.
Step 4. Develop a succession business plan
Plan the transition from the current leadership to the new leadership team. Those passing on the business must prepare to step back from day-to-day decision making. At this stage you will need solid tax advice as you develop a plan to minimise taxes and maximise capital value on the transfer of the business and to address the taxation implications of a transfer of ownership. Our report indicates that tax of family business ranks as the area of most concern, primarily driven by worries around Capital Gains Tax and Capital Acquisition Tax.
It is important that you ensure there is a strong management team in place that will execute the agreed plan.
Step 5. Create a transition plan
Develop a timeline for the implementation of the succession plan. Consider all the available options by developing a plan B or even a plan C, in case your current situation evolves during the planning stages.
Ensuring that all stakeholders have been communicated with and understand the next steps is key in the success of the handover. This is particularly important when it comes to the next generation, the existing management team, and current employees.
Take steps to ensure the management team is prepared to execute the plan. It is vital that you use professional advisors to review these planned arrangements for tax and value efficiencies.
Family businesses are the backbone of the Irish economy
Indigenous family-run firms are a backbone to the economic and jobs gap in Ireland, with 170,000 employers across Ireland they directly provide almost one million jobs. These vital local employers need to continue to be supported as they still face serious disruption from the Covid-19 pandemic, the aftershocks of Brexit, and widespread inflation in the costs of doing business, which is ultimately leading to an undermining of competitiveness.
At Smith & Williamson we believe you can’t start this process too early. Families need to think about the future and plan for succession in advance of retirement, recognising the tax implications and ensuring the appropriate support structures are in place. An advisor can help with the key tax planning considerations and the practical, often emotive, issues of succession planning.
“One of the things we often miss in succession planning is that it should be gradual and thoughtful, with lots of sharing of information and knowledge and perspective, so that it’s almost a non-event when it happens,” said Anne M. Mulcahy, former chairperson and CEO of Xerox Corporation.