More than 1.4 million owners employing upwards of 7.9 million people and contributing almost $500 billion in GDP will retire in the next decade. With family-owned businesses accounting for around 70 percent of businesses in Australia, it is important that current generations consider family business succession planning early to preserve their family wealth.
Business succession planning is a complex process that raises many potentially difficult emotional, financial, tax and legal issues, particularly in a family context. How it is approached can be as individual as each family. But generally it is considered in one of two key ways:
1. Part of broader estate planning
This approach sets out what is to happen with the business and wealth after the existing business owner passes away.
2. Business succession to be implemented during the lifetime of the business owner
In this instance, succession planning is part of the overall business strategy and commences well in advance of the retirement of the business owner. In practice, it is more likely that such planning will take place in a non-family-owned business however, this is not to suggest that family-owned businesses should not engage in business succession planning at an early stage.
Clearly communicating with those who will be affected by the transition is the key to successfully passing on the family business and preserving family wealth for the next generation. Unfortunately many families make assumptions about how this will happen without having communicated it with all involved, nor having set it up so their wishes can be fulfilled.
It is important in this process to remember to include those that won’t be directly involved. Although there will be people who are not active in the business, this does not mean they should not be considered or consulted.This might include extended family such as in-laws. Taking a methodical and thorough approach to planning for the next generation will ensure a smoother transition for everyone involved.
Three Components of Succession Planning
Succession planning can take many forms. However the decision about how to go about it is usually a personal, or at least family, decision. Successful succession planning usually means involving multiple family members and a number of professionals from different disciplines.
There are three key components to consider when transitioning a business to the next generation.
Many business owners of family operated businesses focus on the transfer of ownership or control of the business to the next generation of family members.In focussing on the transfer of ownership there can be a lack of attention paid to the transfer of management. Ideally, planning for the transfer of management should commence well before the transfer of ownership. Transfer of management is often more complex and difficult than the transfer of ownership.
Many families don’t have the difficult conversations needed to make this process as smooth as possible, early on. It is important to determine which family members want to be involved in the ongoing management and operations of the business and what that means for those that do wish to be involved and those that do not. Specific questions about roles, qualifications and experience need to be covered.
Time to Transition
Transitioning management of a business to the next generation takes time. Lots of time. Business owners don’t wake up one day and say to one of their children, “Congratulations! You’re now the Managing Director of the family business.”
It’s likely that as part of the transition relevant training and mentoring will be required. Pinpointing what skills are lacking and setting out to equip the next generation with the necessary qualifications and skills to manage the business will help them to understand the commitment involved.
If the business employs other staff, the transition will also need to be a positive experience from their perspective. Maintaining culture, loyalty and productivity within a successful business is paramount. And, if staff feel like the next generation hasn’t earned their stripes it will likely impact on the way they perform.
It is essential that the transition includes time to get to know the business, to gain valuable experience and allow opportunity for the staff to adjust before handing over the reins.
All the family on the same page
Good advisors and estate planners may suggest the development of a Family Constitution. This is predominantly an aspirational document that outlines the values and common goals of the family in relation to the business. It can specify what the key objectives are, such as building family wealth for the benefit of all family members. The Family Constitution may also set out what the expectations are if members of the family are going to be working actively in the business, in relation to areas such as education, experience and contribution to the business. It spells out the details so that everyone it affects is on the same page.
2. Transfer of ownership
Ideally the transfer of ownership will follow the transition of management. Good planning and open communication with all involved along with their agreement, makes for a smoother transition.
Owners of businesses that are held and operate within the family structure may choose to include their business succession planning as part of their personal estate planning. Rather than transitioning business ownership in isolation, good professional advice from an estate planner will help guide the family on how best to transfer the ownership or control of the business to the next generation..
Expert advice and guidance will encourage contribution from both generations and will consider all parties, even if they won’t be active in the business. This helps preserve family relationships between those that are actively involved in the business and those that may not be, or who might be involved in a different capacity.
3. Tax implications
Consideration also needs to be given to the tax issues that will be triggered when there is a transfer of ownership. The transfer of ownership of any asset will inevitably give rise to the potential liability for stamp duty and or CGT. Effective planning for this is an essential part of the business succession planning process.
The transfer of ownership from one generation to the next should be planned so as to avoid or at least minimise stamp duty and CGT. For some businesses, for example primary production in NSW, there is specific legislation which provides for a stamp duty exemption in circumstances where there is an intergenerational transfer. Consideration should be given to the availability of small business CGT exemptions. For all businesses, with careful planning from the outset, it is possible to structure business ownership so as to enable the transition of ownership or control of the business whilst avoiding or at least minimising unnecessary stamp duty and CGT consequences.
Start early and reap the benefits
Best practice is to have a plan that can be implemented during the lifetime of the business owner. Seeking advice from professionals who are experienced to help guide the family in the right direction is essential. The earlier that consideration is given to business succession planning, the more likely the family will experience a trouble free transition.
The DDCS Business Succession team is highly experienced and specialise in helping people plan ahead for transitions like these. To discuss your circumstances, phone our team on (02) 62127600 or fill in the contact us form and our team will be in touch.