Succession planning is something that you may not have thought about during the recession years, as all of your time and energy was invested in the survival of your business. However, now that our economy is showing signs of continuing recovery it is important that you take the time to establish, or in some cases re-visit, a succession plan for your business. For many business owners the obvious successor for the family business is their child or children; however many procrastinate with passing on the family business as they feel they may be forced into retirement too soon. Such a fear can prove detrimental, as on retirement the business will be left without a clear leader to manage operations going forward. We have reviewed some aspects which you may wish to consider when preparing the next generation for ownership and management of your business.
1. Identify a Successor within the Family
One of the more difficult aspects of putting a succession plan in place will be confronting your own end game, which is never easy for a business owner. However, the future success your business, along with your independence on retirement, is dependent on the early implementation of a succession plan. The transition of the business from its founder, who owned and managed the entire operations on their own, to a child or number of siblings will be a complex transition. The success of this transition will be dependent on the willingness of the family, as a whole, to work together and plan for the succession process. One of the main advantages of having your children as your successors is that they will have an inbuilt understanding of your core values, along with a desire to carry on the traditions and reputations which you have worked hard to established. While family will be a good cultural fit for your business, it is also important for you to ensure that they are both interested and equipped with the necessary skill sets to fulfil the role. A sense of duty is an important factor; however this alone is not enough to ensure the future success of your business.
2. Identify the Skills and Abilities of your Successor
As with any successor, identifying the individual skills and abilities of your children will be vital. In some cases one child may meet your specific requirements, but it is unlikely that one child alone will possess all of the ideal skills and behaviours you desire. It is important that you define the various leadership roles available and line these up with the individual core competencies of each of your children. Some children may already work within the business and their natural abilities will be evident. For others it may be beneficial for them to work outside of the family business for a while or take a management course to develop the necessary skills required. While it may be your intention to pass your business on to your children, you will sometimes have key members of staff which you may want to retain. It is important that you keep these individuals informed of your decisions and possibly have them involved in the mentoring and development of your children, as they can provide you with a valuable independent perspective.
3. Prepare a Development Plan
In some cases your children may have been working in the family business for a number of years; however they will still have a lot to learn before they are ready for management and ownership. To ensure a structured transition occurs, it is advisable to put a development plan in place. Such a plan will ensure that your children understand all aspects of the business from managing staff to understanding the financial requirements of the business to name but a few aspects. The following are some steps which will assist you in preparing a development plan.
- Identify the skill sets required by your successor/successors, along with training and development needs.
- Implement a mentor relationship. This may be a relationship between yourself and your successor or alternatively between a senior member of your team and your successor.
- Set objectives for both the mentor and the successor. These will need to be reviewed on a regular basis with feedback provided. You may find that the objectives will be amended as the training progresses.
- Transfer knowledge to the next generation. This will be a difficult step for the owner manager; however hands on experience will be vital for your successor.
- Outline your own retirement date and put policies in place for your involvement, if any, after you retire.
4. Your retirement
While succession planning is mainly focused on the continuance of your business you must also factor in your own retirement needs, as you may not want to become dependent on your children. One obvious way to secure your income on retirement is the establishment of an approved pension. This is a clever mechanism for extracting cash out of the business as a company can make a contribution to a pension scheme on your behalf. Such contributions by the company are not treated as BIK and the company’s contributions can be significantly higher than your own personal contributions. Furthermore, contributions made by the company can be included as a deductible expense for the company. Another factor for you to consider is the entitlement of both yourself and your spouse to a State pension. Entitlement to State pension is complex and based on your level of social contributions made. Planning your social contributions at an early stage will secure the entitlement to the State pension for both your spouse and yourself on retirement.
5. Put a Will in place
Putting a Will in place is something everyone should consider and deserves a lot of attention, particularly if there is a significant level of assets to consider. It is advisable to seek professional advice when establishing a Will, to ensure that effective tax planning can be discussed. In recent years we have seen many individuals taking advantage of the fall in property prices and completing lifetime transfers of assets to children. Since 2009 the tax free threshold from a parent to a child has decreased from €434,000 to €225,000, which will have a significant impact on the level of tax payable by children on inheritances. When considering the transfer or sale of your business other factors such as retirement relief should also be considered. We will cover this topic in an upcoming blog. Once you have established a Will it is equally important to revisit it on a regular basis with your solicitor. Your solicitor should also be made aware of your most up to date Statement of Affairs, along with knowledge of where important documents, such as title deeds or life policies, are retained.
Starting your succession plan
As a business owner you will have spend significant time and money in growing your business. To secure the future of your business, your family and your own retirement, it is important that you put the necessary steps in place to protect the wealth you have created. Passing the family business onto the next generation involves analysis of a number of complex issues and it may be advisable to speak with your financial advisor or accountant as they will have an understanding of your business and will be in a position to guide and advise you when planning the transition process.
