Providing confidence to the market and key stakeholders that the organisation’s vision will remain on track when transitioning a family business is paramount.

Equally, the structure you select for your business transfer will depend on the objectives you are trying to achieve. This process takes time along with a lot of careful planning and thought. It can be one of the toughest and most critical decisions a business will face, yet the one most likely to be viewed as too hard. Business owners need to view succession structuring as a unique opportunity that rewards them for their time and effort over the years, and provides a way of continuing those rewards for future generations who invest their time and energy into the business. Succession planning can secure the current business owner’s vision for the future and their future standard of living.

A lifestyle vision
When considering succession, business owners need to look at what they believe the future of the business will look like, and what they want their future lifestyle to be.

This will include careful consideration of the following key questions:

  • Do you have any plans post succession? Have you considered hobbies or volunteer work?
  • Is an ongoing income required from the business? If yes, how much and how frequently? 
  • Do you intend to still be involved in the business in some other capacity, such as a mentor?

A business vision
Business owners also need to carefully consider not only their own goals and objectives, but whether these goals and objectives align with the expectations and capabilities of other parties involved in the business.

It is important these align with the planned exit strategy by considering the following:

  • Do you know the views and intentions of all family members? (running the business or taking a profit share)
  • Do you know the views and intentions of key staff members that are not related?
  • Have you objectively assessed the capabilities of those whom you believe are best suited to succeed you? 
  • Have you considered those who may not be ready for the role but could be with the appropriate training and mentoring?
  • Do you know the views of key stakeholders in relation to your succession plan?
  • Does your proposed successor genuinely want to take on the role because they’re passionate about the business and want to lead the business into the future, or because they feel obliged or pressured to take on the role?
  • Have you taken a step back to assess your proposed successor’s capabilities from an outsider’s perspective?

Knowing the views and intentions of both related and non-related key stakeholders is critical. It is important to sit down with all involved, separately and as a group to discuss your intentions and their expectations. The opportunity has to be given for all involved to have a say. These discussions are also likely to bring to light any key issues that you may not have previously considered, as well as who would like to be considered and who has the capabilities to become a successor.

Whilst it can be hard letting go of the reins and acknowledging whether or not your future successor can do the job as well or better than you, it’s important to remember that you would like the business to continue succeeding into the future with or without you. Therefore, you need to allow people the opportunity to learn the role, make decisions, make mistakes and learn before you transition out of the role.

An external vision
The relationships that your future successor has with various lenders and funding institutions will impact on the future success of the business. Lenders want confidence in the sets of numbers they look at, and the person presenting them. Therefore it is imperative that you start creating the opportunities for your future successor to develop those relationships by being involved with the relevant people. This ensures a greater chance of these funders supporting the business plans of your future successor, creating a smoother transition.

Similarly, does your future successor have the backing of external board members? Will these people be willing to support your future successor and put forward their opinions and viewpoints objectively, honestly and openly in spite of how they may feel personally about your successor or how the successor may feel about them?

For example, you may have noticed over the years that Richard Branson is no longer the star of Virgin’s advertising campaigns. This is a strategic move to ensure that the public views Virgin’s reputation as being created by the business as a whole, rather than by the actions or perceived presence of one person. This is in contrast to businesses named after the founder. Without an obvious successor and a reputation built solely on the work ethic of the founder, future business growth may be unstable. In planning for succession, it is imperative that consideration is given to all business relationships, including suppliers and investors who will be looking to a strong leadership team that will sustain the business outside of its founder’s abilities.

Planning for a handover
Once your future successor has been identified, it is important to be upfront about how succession will take place, for how much and when. Will there be a transfer of shares or units? Will new members be appointed to the Board or will there be changes in remuneration? It is vital to not only look at management succession, but ownership succession as well. Ownership stability is crucial in any business and while transferring shares might seem like the most logical way of transferring ownership, it can be a source of problems later on down the track. Different levels of experience, roles and external circumstances between family members can create shareholder issues as more people become involved in the business and the share of the ‘ownership pie’ dwindles. The individual income requirements of the shareholders may not always align with the working capital requirements of the business. Therefore it is imperative that there are clear and known procedures surrounding the business’s ownership structure and the procedures for any valuations, transfers, acquisitions or disposals of ownership and payment of dividends from the investment.

Securing the future of the family
A strong succession plan will also take into consideration the future ‘what ifs’. In spite of the best of intentions, ‘happily ever after’ does not always exist. So how do you put in place a succession plan that protects the family business, both present and future, should there be a falling out amongst those involved, or should something happen to the leader of the business? It is therefore important that you have plans to protect the business from the consequences of such fall outs. Whilst having a will and enduring power of attorney in place is essential to protect your visions for the future, it is also essential to ensure that these documents are regularly reviewed and updated where necessary. This ensures that regardless of what happens to you, your family are taken care of and your wishes are carried out. Likewise, it is important to ensure that your advisers (including your accountant, lawyer, banker and financial planner) are well instructed in these matters. Binding death benefit nominations for your superannuation assets are also critically important, as superannuation does not automatically form part of the asset pool in your will and should be reviewed regularly as they lapse every three years.

Implementing a family charter and a family council is an effective way to minimise the potential for arguments to arise and remain unresolved. A family council can be likened to a Board of Directors for a family. Their role is to provide a forum to openly discuss and resolve all family matters relating to the business including leadership, management, ownership, remuneration, training, performance expectations, career development and managing change for all family members. Meetings are usually held at a neutral place, away from the business premises, with a set agenda designed to resolve any matters and positively move forward collectively as a family group towards a resolution. Whilst a family charter can take time to develop, it is a document that captures the objectives, values and beliefs as well as guidelines for all family members in respect of the business

In summary
When planning for succession, firstly take a look at what structures you already have in place that may provide guidance on how any business transfer will take place. Does this align with your intentions? If not, this will then provide the framework for any discussions, additions or changes that may be required to solidify your intentions for the future direction of your business. Make certain you have plans in place that can deal with the ‘what ifs’ and have something to retire to. Have open and honest discussions on a regular basis with all stakeholders and ensure that you regularly review you succession structure, revising it where necessary so that you know how you will be exiting and that it is the right exit strategy and succession plan for you and your business. Circumstances can change over time; whilst succession planning can be a difficult process, a well thought out and implemented succession plan can ensure the financial security of a business founder, a stronger family identity and the future success of a business without its founder.