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Succession planning made simple print Print

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Many family businesses eventually pass to other family members or to selected employees, yet this process is not always successfully handled. This guide explores some of the key issues involved and explains why advance thought and proper planning can make a huge difference to the outcome and survival of the business.

Research into the success rate of family business transitions makes sobering reading. One American survey comments that 'more than seven out of ten family-owned businesses fail to survive the transition from founder to second generation, typically falling prey either to estate taxes or family discord - or both.' Another article claims that 'barely 30% of family businesses survive into the second generation and fewer than 15% of them endure into the third.' If you are facing the need for a transition in your business these statistics should in themselves convince you that it is better to be proactive in succession planning rather than wait for a crisis situation (such as a serious illness or other incapacity) to develop.


The need to plan ahead

What these figures show is that, like so many other aspects of a business, advance planning makes the difference. In other words, your chances of creating a successful transition of your business will be greatly enhanced if you plan properly for the transition. The more time and forethought you can put into the process, the better the outcome is likely to be.

Delaying that planning

Reasons why business owners delay taking action over succession planning include:

  • Simple procrastination. 'I'll get round to it someday' leads to many fine family businesses eventually being disposed of by executors - often on far less advantageous terms than a planned succession might have brought.
  • A reluctance to face the fact that their business life is coming to an end.
  • A strong emotional commitment to the business, which was part of its success, but which also makes it hard to 'let go', to surrender control and power.
  • A reluctance to tell children about their destiny. This is often because there is some unresolved tension or conflict between the owner and a child (for example, a father seeing his son as a rival).
  • Uncertainty about the capabilities of the family member who is the obvious successor. This reluctance is sometimes cloaked by illusions of indispensability: 'no one can run the business as well as I can - after all, I built it!'
  • There are too many claimants to the business, so the owner shelves the problem of its transition rather than facing the dilemma of finding equitable treatment for all concerned. In an extreme case, the owner might prefer to sell the business to an outside person to avoid facing these issues.

There are, of course, many other reasons, some of them that the business owner is aware of, some of them unacknowledged. Unacknowledged or 'submerged' reasons might include the awkwardness of role reversal. As generations age, children who have been under the emotional and financial control of parents reach the point where the 'balance of power' starts to reverse, with the children needing to look after the interests of ageing parents. Few parents enjoy the thought of this transition or its implications.


Reasons for taking action NOW

  • The prime reason is that there's a far better chance of a successful transition.
  • You want your business to survive - it's your 'legacy'. The longer the period of planning before succession takes place, the more likely this is to happen.
  • You want your children to inherit a flourishing business.
  • You want your children on your side, not against you or in conflict with you. Open communications and advance planning are the keys to this result.
  • Advance planning allows you time for proper training and 'phasing in' your successor(s).
  • You can set your retirement goals so that these become part of the planned succession rather than a surprise (and possible burden if you need to drain money out of the business) to the successor(s).

Employees can be 'family' too

The reality in many businesses, if no children are involved or interested in succession, is that a favoured employee or manager, or group of employees are groomed for succession. In effect they are treated as 'family', with the owner(s) making special arrangements for them.

  • Inaction might cause the loss of the child (or that key employee whose capabilities you respect) if you don't make your intentions clear. They may not be prepared to wait around forever while you make up your mind.
  • Proper planning is likely to produce a more tax efficient result for all parties. For example, you might need to change the structure of the business.
  • If the business is owned by multiple shareholders or other partners are involved, the need for proper succession planning is even more urgent. You may have to work your way through complex issues, and the sooner these are confronted and resolved, the better.


The key issues

Succession involves two distinct actions: transferring assets and transferring control.


1. Transferring assets

In order to transfer assets, you must know what they are worth. So your first step is to get your business valued by an expert. Once you know the current value of your business, you can make plans as to how you will get appropriate payment for those assets. If the line between personal and business assets is blurred (as is often the case), this is the time to sort out the issues.

Leaving a workable business

Your ultimate goal is to get a price for your business that will enable you to meet your post-business goals, but also leave the new owner(s) in a strong enough position to survive. For instance, if the new owner(s) have to strip out working capital to pay debts and taxes, they may be starting their tenure with a large handicap and the business might not be viable.


2. Transferring control

Selling in the family

Your basic decision here is who to sell the business to. This article covers selling the business to family members.

Grooming the successor

Choosing a successor (or successors) well in advance allows you more opportunity to groom the person in the core values and special skills needed to run the business successfully. If you choose one child over others, then you'll also have to work through the issue of being fair to all concerned. You may also have to consider giving some ownership to key staff in order to retain their services.

Action you can take

There's no need to shoulder all the burden of the required decisions by yourself. In fact there are very good reasons for putting together an informal transition team. This will help you get clear advice from people who are not emotionally involved in the issues, and from people who may have handled numbers of business successions. For example, you may not be aware of all the special skills you have that are necessary to the continued success of the business. Advisers can help you identify these skills so you can better prepare your successor(s). Successful transitions are a process rather than a fixed event. In other words, the succession happens as part of a planned process, not as a sudden handover on Friday afternoon at 4:30pm.

Your transition team

Create a transition team who will help you put together a plan for succession and for your exit strategy. For example, your team might comprise:

  • An accountant
  • A lawyer
  • A tax expert
  • A business broker or valuation expert
  • A trusted business colleague

Open planning and communications

Rather than being secretive, tell your successors and your transition team about your retirement or post-business plans and goals so you get their 'buy in'. For example, if you expect the sales of the business to fund your retirement, spell this out. "In order for the plan to work, I need…" is a good start. Let everyone start working on approaches that will allow you to achieve your goals through the transition while ensuring that the business remains viable. There might be a number of ways to accomplish your financial goals.

Affording the business

A major hurdle in business succession is that the child or children can't come up with full amount of money to buy the business, or if they did, they would be left so stretched that they would lack the working capital to run the business. After all, you have probably built up the asset value of your business over a period of time. Advance planning is often the solution here. For example, setting up a trust to own the building or the major assets that the successor(s) can lease from the trust. This approach allows the successor(s) to buy the business in stages: first the trading part, then the major equipment and assets, then possibly the building. This approach could provide a good income flow to the retiring owner, but might involve a fundamental restructuring of the business. If so, the sooner this is started the better. For instance, gifting (to a trust or a child) is limited to $27,000 a year per person. It can therefore take years to complete a gifting process.

Some external funding is usually required, so the sooner you speak to an ANZ Business Specialist about the options available to you the better.

Case study: building/business split

Fred had built up a substantial furniture making business in a fully owned building. On the advice of his transition team, Fred split the building from the business. He sold the business to his son (who ran the factory) and daughter (who marketed the products) and kept the building as their landlord. They signed a long-term lease for the building, and this rental income, coupled with cash for the sale of the business, was sufficient for Fred and his spouse to retire in the way that they had planned.

Minimising tax issues

Expert advice will enable you to minimise the tax effect of your business transition. In some cases this might have the effect of increasing the value of your business. But it can be a mistake to focus too intently on taxation at the expense of other issues. It is more important to ensure that everyone ends up with a workable solution: you with sufficient funds for your post-business goals, and your successor(s) with a viable business. Note also that Inland Revenue has been known to overrule schemes deliberately set up to avoid taxes.



The most important points in succession planning are to start thinking about it sooner rather than later and to put together a transition team that can help you work through the issues involved.

Walking away

Unless you're invited to continue giving advice, one of the hardest (but most necessary) parts of passing on your business is walking away from it. Once the transition has taken place, let the new leader(s) make their own decisions. Of course they will make mistakes, just as you probably did in your early days, but they must also be allowed to grow into their roles without constant advice or second-guessing on your part. Once you let go, let go!


Further information:

To talk to an ANZ Business Specialist:
Call 0800 269 249
Visit your nearest ANZ branch


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