Succession Planning for the Family Business

What is it, and can I benefit from it?

What is it?

Succession Planning is the process of setting in place, the plans and business structures, to allow for the next generation of your family to operate the family business, following your retirement.

It is also an element towards the goal of working 'on' your business rather than 'in' your business.

Who might this be of Interest to?

The concept of succession planning will be of interest to those clients who set up in business when they were in their 20's or 30's and are now looking at stepping aside to let their children take over the family business.

The process might be as simple as removing any operating assets (plant and equipment, vehicles etc) to another company and retaining the land and buildings in the original entity. This can provide a fixed rental income to the parents following the possible disposal of the operating company.

At the other end of the scale are very elaborate structures. All, of which are very dependent upon the individual circumstances, involved.

Accomplishing these objectives takes a proper amount of planning, experience and time. Yet, in the end, the process and results can prove valuable and, yes, even profitable to the business.

What is involved?

There are several options to be looked at when contemplating any review of how your businesses are structured. These options can include any of the following:

Companies
Qualifying Companies
Family Trusts
Trading Trusts
Partnerships
Joint Ventures
The use of Nominees

The bottom line in any review of your business structure, is the need to explore fully all of the costs and benefits of each of the above options from every angle.

This review should involve consultation with the following:

The principal person currently involved in the business
Their spouse or partner
Children
Professional advisers (your accountant and lawyer)

Steps Along the Way

There is no standard to this process; however, the following steps will need to be covered as a general guide.

Define what the owner, family and company really want.
Evaluate and test, planning goals to confirm and to achieve feasibility and compatibility
Develop a preliminary plan.
Communicate and share the preliminary plan, build consensus and revise the plan as necessary.
Implement the plan for the owner, family and company.

How Can I Benefit?

The process provides a degree of certainty and a pathway for the future. The process can allow any capital gains to be allocated to the owners in a tax effective manner, whilst providing for future generations a mechanism to move the family business to greater and better things.

What are the Costs?

The great unknown! As each circumstance is different all this article can provide are the common costs that may arise:

Depreciation Recovered, on any Fixed Assets transferred to another entity. This transfer generates a sale at market value as far as Inland Revenue is concerned.
Income Tax, there may be a one off cost in some circumstances, in order to set up the most effective options.
Goods and Services Tax.
Conflict, the family may or may not agree with your thoughts as to who is best to run the business.

Common Mistakes

A mistake we often see is the plan overlooks the area of financing. Some succession plans simply incorporate life insurance and assume that they have covered all their various needs.

While life insurance may play a critical role in the succession plan, it is important to remember the objectives of the owner. If one of the objectives is to have a financial payout during his or her lifetime, then this element must be considered as well.

Summary

In summary, each situation is different. There are issues to be looked at and worked through for a whole raft of different scenarios and permutations.

Because every action has a reaction within the process, the initial planning and development of the plan require technical expertise and experience.

If however, you wish to explore this area further, please contact your adviser at Carran Miller Ltd