24 February 2023

When you’ve poured your heart and soul into building a business, it stands to reason that you would want to hand it down to your children or grandchildren so they can build on your legacy. However, it’s not quite as straightforward as stating your wishes in a Will or signing some paperwork upon your retirement – you will need what is known as a succession plan.

What is a succession plan?

Essentially, a succession plan is the transition of a business and/or assets to the next generation in an orderly fashion. It can also include having strategies in place for when other valuable people get promoted, leave, retire or pass away in order to limit any disruption and keep the business operating smoothly.

The question then becomes how do we achieve this?

Succession can be determined in one of four ways: by bequest (given on death), battle, primogeniture (right of succession belonging to the first born) or parliament, with each having their own set of risks or implications. While some of these methods may seem outdated, all four are still used today and present inherent risks as outlined below.

• Bequest. Leaving assets upon your death without prior planning or clear instructions can open the door to litigators acting on behalf of parties who feel they have been treated unfairly. The current generation of landholders are more open to transferring assets prior to death, but this is still used in certain circumstances.

• Battle. While waged with words rather than with swords this is not a preferred option as legal battles can result in a reduced asset base, putting the future viability of your business or assets at risk.

• Primogeniture. While it’s no longer customary for the firstborn child to solely inherit their parent's business or certain assets, primogeniture still exists today but in the form of a sense of entitlement seen in some members of the younger generation. This requires management in the planning process to ensure that the needs of the ownership generation are addressed.

• Parliament. Parliament determines the movement of assets where the individuals pass away without a Will. This is not a preferred option as the movement of assets is determined by law.

When handing down your family business to the next generation, our preference as finance professionals is to tailor a plan that suits the circumstances of each individual business or family.

How to start a succession plan

A good succession plan is typically based on three values: communication, education and planning. In order to help you achieve desirable outcomes at every level, we recommend putting together a strong team of professionals to assist you in handing down your business, some of which may include:

• An accountant – to provide guidance and ensure current business structures are understood. They may also make suggestions for possible restructures to help incorporate the next generation.

• A financial adviser – who understands the nuances of family and business finances and can provide guidance on debt restructure as well as the ability to raise additional debt, if needed, to fund additional assets for retirement.

• A solicitor – to provide expertise relating to the cost of transfer and to help ensure that the final agreements reached are documented to protect all parties involved.

• A facilitator or mediator – independent from all stakeholders, they should ensure each person is heard and that these conversations and outcomes are documented.

Communication

Once you’ve assembled your team of professionals, start by having a conversation between all current business owners and ensure they are in broad agreement of:

• What the future goals are (both personally and professionally)

• The needs versus wants for the business

• Any non-negotiables

• Expectations of the next generation

The key is to be open, honest, and realistic. These initial discussions will bring to light areas where there needs to be input from professionals to help achieve the desired goals. Any professionals you enlist to facilitate these conversations should be able to educate and guide you on how to structure the transition of your business or assets.

Next, it’s time to extend the conversation to family members remaining within the business, and those who are part of the family unit but working outside the business. These conversations need to address the security of assets and income for the remaining members, ensuring that a workable business unit remains.

Education

For family members working outside the business unit, it is important to consider what level of involvement they desire. Some may wish to be involved in major strategic decisions and, rather than pay the member out, a transfer of assets may be more appropriate accompanied by lease or rental payments.

Whereas others may wish to be paid out so they can make their own investments thus creating their own wealth. Both options involve a balancing act between maintaining a viable business asset and being fair to the exiting family members, who should be educated on what their options are.

Planning

For the succession process, it is important to understand the current structure of the business and the challenges faced by the current business owners. Many family businesses today face stagnant income, rising costs, high debt and poor cashflow.

After a broad agreement is reached, it is then time to put a plan into motion, highlighting the specifics around any agreements reached to ensure that all parties are protected and have a clear plan to work towards. We can provide advice to help you in the balancing act of maintaining a viable business asset and being fair to the exiting family members.

Do you plan to hand down the family business?

At Findex, we want to help you get it right with your family and your business. As well as assistance with succession planning, we offer wealth management services for the whole family and business advisory, where we consider your goals, objectives, and needs to come up with a tailored financial plan to help benefit you and multiple generations. If you have any questions or would like to speak with an experienced finance professional, contact us today.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the thought or position of Findex (Aust) Pty Ltd ABN 84 006 466 351 (Findex).

24/02/2023