Succession planning for family businesses
Peter Bembrick, HLB Australia
Many people like the idea of a son, daughter, or other family member, taking over the business when they retire, but they need to think carefully about this approach.
There is often a balance to be found between helping out the next generation and passing on the “family jewels” to them, and providing sufficiently for the founders of a family business to enjoy a comfortable retirement and benefit from the fruits of all their hard work.
However, several key questions need to be asked before handing over the family business.
Does the family want to take ownership in the first place?
The first question to ask is, are there any family members ready to take over, as well as interested in and capable of taking over, or at least become more heavily involved in, the running of the business? It may be the case that the family isn’t as keen on the idea as they are. If there is no obvious family candidate, business owners need to look at other options. Perhaps the family retains ownership of the business, but someone else takes on the management and day-to-day running of it. Business owners therefore need to consider whether there are key employees who could be involved in a business succession, or is it more likely that the business will be sold? These questions are critical to any family business owner when planning for their retirement.
Should key employees also receive shares in the business?
Another consideration is whether there are key employees who have been, or will be, critical to building up, maintaining and continuing to grow the business, and whether providing them with some ownership interest in the business will help incentivise them and make it more likely that they can be retained. This needs to be balanced off against the expectations of the family to retain control or even complete ownership in the medium and long term. One approach might be to issue shares to a key employee but with a mandatory buy-back period and other conditions that allow the family to take back complete ownership in due course, or on certain events occurring.
How will the business be split up amongst the family?
Another potentially tricky situation is if some, but not all, of your children will take ownership of the business. In this scenario, how will the family’s overall wealth be divided amongst the various individuals? It is important to be clear about which assets, and the extent of income distributions, will go to the children during the business owner’s lifetime, compared to assets and funds that will be retained and distributed only after their death.
When will the family receive wealth from the business?
The difficult process of dividing the family wealth amongst the members of the next generation also includes balancing the relative value of giving, transferring or leaving ownership in the business assets or entities to one or more family members who are involved in the business, and providing other family members with non-business assets. It can also be more difficult where some family members receive funds earlier than others (either due to their age or their personal circumstances) – and even more so where some effectively receive a portion of their “inheritance” during their parents’ lifetimes, in which case their siblings may need to receive a greater share of the assets under their parents’ Wills in order to maintain equity.
Alternatively, if the shares in the companies through which a family business are to be carried on are simply left equally to all of the founders’ children, but not all of the children are involved in running the business, this can sometimes produce a difficult situation where at some point there must be a negotiation between the siblings to agree a buy-out of some of the shares. Funding such an acquisition is not always straightforward.
What are the tax implications for the business and family members?
Last, but certainly not least, difficult tax issues can arise in every one of the scenarios mentioned above, and careful planning can help make sure that family business owners do not end up handing over more of their hard-earned wealth to the tax authorities than is necessary.
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