Planning for Succession

The earlier the planning for succession commences the easier the process will be.

Having spoken with many families what they commonly say the two biggest concerns parents have in regard to passing on their assets are:

1: their will is contested
2: their children will fall out.

There are a number of risk management strategies to minimise those events occurring.

1. Decide as parents: do you want to be able to hand assets on to your children?

Most parents on making the decision to hand assets on also want to be fair to all children. It therefore important to distinguish between being fair and equal –

• a small sum earlier may suit some of the children,
• if a adult child works in the family business and is not paid fair market value for their work how will that be taken into account,
• if some of the children don’t inherit until someone dies (which as the population ages is getting longer and longer) what will that share be worth at that time is that reasonable compared what the others may get?.
• Develop a range of assets to pass on to children and to ensure your comfort as you age, eg as each child is born establish an investment fund, diversify into other assets.

2. As your children become adults, involve them all in decision making forums regarding succession?

It is every parents right to do what they want with their assets however as the concerns already mentioned are for the ongoing family relationships it is important to involve the family.

If the family (all children and possibly spouses) are involved in open discussion and given the opportunity to make decisions the risks of a family fall out are minimised. Conversely if siblings do not get the opportunity to be generous to each other, or are presented with a ‘fait a compli’ they can become quite spiteful. Given input and the opportunity siblings are often very generous to each other and their parents.

A facilitated family business meeting is an ideal method of allowing all family to speak openly and reach agreed decisions – the written record of these meeting then indicate legal intent. (click here for more information on family business meetings Family business meetings/Facilitated)

3. Developing Legal and Accounting structures to manage succession.

Having the right business and legal structure is vital. What accountants and lawyers tell us is the difficulty is in getting the family clear about what they want. Once a family is clear about what they want the setting up of the structure is easier and effective long term. Going straight to structures without consulting with the family can lead to a number of issues

• Complex structures people don’t understand
• Structures not relevant long term and costly to get out of
• Structures that ‘exclude’ family members and spouses leading to significant break down in relationships.

Once again a facilitated family business meeting is an ideal first step where family reach agreement and then take those agreements to their solicitors and accountants. (click here for more information on family business meetings Family business meetings/Facilitated)

4. Managing the ‘In Laws”

On speaking with many family businesses throughout Australia a major concern is what happens if we hand the business on to our child and then their marriage breaks up.

Speaking with many ‘in laws’ one of the great strains on the relationships is the feeling of being excluded and not trusted.

Marriage breakdown is a real risk close to half the marriages in Australia end in divorce, this is not confined to the younger generation there is significant divorce rates in the older generation also.

Managing this risk is quite possible and often when families sit and talk openly about their concerns they come up with very sound ways to manage the risk and retain solid relationships.

Be inclusive on people coming into the family business through marriage.
Involve them in discussions. Have process within the business that deals with family members marrying and divorcing – get the process in place before the people.

What some families do:

• spouses are welcome to become part of the business – they buy in or work their way into a share.
• a time frame is set new people can join the business after a number of years
• opportunity to have a share in the trading entity but not land assets
• the business takes on spouses to compliment the skills required in business, if the business requires skills the spouses don’t have the business will help them develop them.

Succession of Management

Additional to managing assets and the family relationships the succession of business management is important.

Ideally this should occur gradually with set time frames or milestones that are negotiated at the beginning and that everyone is clear about.

Ideally the elder generation have decreasing control and input while the younger generation increase their control and input and there is a point in time clearer identified where the lines cross – as per the chart below:

Succession planning within family business requires a high level of skills in both communication and business and the risk to both the family and business are high if this is not done well. Bringing in outside assistance to work with families is often very helpful.

There are many professionals available to assist; we would suggest starting with sitting the whole family down for a meeting and involving an outside facilitator to ask the hard questions and keep the focus of the day plus the business accountant. From that meeting it will become apparent what other assistance to obtain which is often, for example:

• Financial planning advice
• Legal advice
• Accounting and business advice.

To find out how to go about organising a meeting click here – not linked(tips/organising a facilitated family business meeting)