Beryl Power from PwC outlines the key steps to successfully plan for business succession.
There are many issues facing Irish owned businesses such as job creation, retaining key talent, raising investment and business succession. These are all important issues, but business succession is particularly important and one which can be long fingered by some business owners.
The 2021 PwC family business survey highlighted that only 23pc of Irish family businesses have a robust documented and communicated succession plan in place, compared with 30pc globally.
“The pitfalls of not having a succession plan can be huge, such as conflict in the family, business, or both, which can ultimately result in the failure of the business”
One of the reasons why this might be so low is because a business succession plan often deals with sensitive issues, which can be emotional and hard to navigate, and as a result, tempting to avoid.
Key steps to consider when succession planning
- The plan for the business. Broadly speaking, there are 3 types of succession plans for businesses being:-
- Family ownership with family management,
- Family ownership with external management or
- A sale of the business.
- The ability of the next generation/key management to take over the business. If there are skill gaps, then the plan needs to deal with these.
- The wants and needs of family members – particularly those working in the business versus those not working in the business.
- The role of key management in developing the plan and managing the transition.
- The tax implications of any potential plan and ways to minimise the tax burden.
- Document and communicate the plan with key stakeholders in the business; particularly, family members, which can help to minimise conflict in the business and the family.
- Get professional advice.
Where succession planning can go wrong
Business owners tend to instinctively know if their business will be ultimately sold or passed to the next generation. They also tend to be good at seeking professional advice in relation to the transfer of the business. But, other areas of the succession plan might not get the same attention.
The lack of involvement of non-family members on the Board of Directors can be one of these areas. Having external Board members can often help ensure decisions are strategic and made in the best interest of the business. While this is becoming more commonplace in succession plans, it can still be an area of weakness of many family businesses.
Another area of difficulty and conflict can be the treatment of children working in the business versus those not working in the business. Should the business only pass to children working in the business or split equally amongst all the children?
Ideally, it might be better to leave the business to the children working in the business, but this is not always possible. The business can often be the main asset of the owner and therefore some element of split may be unavoidable. In this situation, it is important to clearly outline the role and responsibilities of the different family stakeholders, as well as the reward packages (salaries for those working in the business and dividend policies for family shareholders).
On the plus side many business owners are encouraging their children to work outside of the business and are investing in management training programs. This will have a very positive effect on the business going forward.
The ESG (Environmental, Social and Governance) agenda and sustainable business practices is a priority for a lot of publicly quoted companies but may not be as much of a priority for smaller family owned businesses.
One of the reasons for this might be because first generation family businesses tend to focus on establishing the business, growing the business and dealing with day-to-day operations. Second and subsequent generation businesses tend to have more of a focus on ESG and this could be because these businesses are more established, and the owners are generally in a better position to take a broader view on the business and its values.
The pitfalls of not having a succession plan can be huge, such as conflict in the family, business, or both, which can ultimately result in the failure of the business. This could be one of the reasons why only 33pc of family businesses make it to the second generation and only 15pc to the third. These are frightening numbers when you consider that family-owned businesses account for about 50pc of employment in the private sector.
Succession plans are key in helping the business survive and transition to the successors. It is important to have one, but it can change and develop over time. Having a well thought out succession plan will help minimise unnecessary tax as well as help to reduce conflict in the business and the family.