Unlocking potential aids succession
Succession is often the elephant in the room. It may be tricky but it is the most important discussion you can have, potentially impacting both the longevity of a business and personal happiness of everyone in it. It can also be the keystone to unlocking the potential within the family resources and skill set. Get it right and success of the business will follow. Often different family members have differing, but equally valid objectives, and without good communication and understanding may end up pulling in different directions. Everyone meeting their objectives and feeling satisfied in what they do is immensely powerful but it can only be achieved if everyone is open and honest with one another and respectful of different objectives within the family.
Statistics show that there are 3 main reasons for succession failures:-
60%- lack of communication
25%- heirs not ready for succession
3% - poor financial planning
This shows the keys areas to overcome if you are going to make it work for you and your business.
Communication
This is the most common and most difficult issue when looking at long term business planning! Here are some key points to help you.
Talk about it
Set up a separate meeting to talk about long term planning. Avoid talking about day to day matters. Get a third party such as your accountant or consultant to help you if necessary, to keep the meeting focused and to ensure everyone is heard. It is critical that you are honest about what you want and also that you listen to others .
Set objectives for the people and the business
Get everyone in the business to set out their objectives for the business and themselves. It is critical here that everyone is honest and that you listen to others – Success is about understanding and meeting what everyone needs. Think about how different people at different stages in life will have different objectives and risk profiles and how you can harness that, to achieve what everyone wants to make a much stronger business. It is also really important to discuss housing requirements.
Resources
Think about resources that you have - the skill sets, interests, experience and capital available and how you can harness that for the success and satisfaction of everyone and success in business. Consider the broad stages that the parties are likely to be at and how that affects their wishes and approach to risk and you will then look at how you plan differently. No one is wrong for having their personal objectives and aims, however it is appreciating everyone else's position and thinking about how you can deal with this in your business structure that will really make a difference.
Set a plan
Try to structure the plan to meet all objectives as far as possible. For example if one generation wants to expand the dairy and borrow– they could take the bulk of the financial risk but the older generation could hold onto the assets and provide security having a fixed income for lower risk. There is never a single solution here but it is critical that you look at the objectives and risk profile and plan accordingly. If you have one generation who want to take risk and develop the business and the next holding back because they do not want the risk or hassle, if you do not deal with the concerns they will be pulling against one another and will hold the business back.
Tax is important and needs to be considered but only after you have a long term plan that works for all.
Get the right legal documents in place
Once you have a plan then you need the key documents in place so that everyone knows where they stand and the right protection is there. The key documents are partnership or shareholders agreements, wills and land ownership documents. Don’t forget to talk to the bank if you are changing ownership or security for lending.
Keep talking
Follow it up with annual meetings to monitor progress and to facilitate regular discussion about objectives and strategic direction. Make changes if required.
Prepare the next generation
Harness the power within the people and start early – we live in a technical world and it changes rapidly and the next generation are the key to staying ahead.
This could involve some or all of the following:-
- Training and experience – they need to be ready for a very technical industry and to be at the forefront. Training should be both education, talking to others and experience. Give responsibility for parts of the business using their strengths e.g calf rearing, or even the paperwork! Moving capital (land and assets) can be separated from succession to the business to allow them to make mistakes without jeopardising capital.
- Being involved in day to day decisions and even longer term decisions especially as they are the ones that may be repaying the debt.
- Attending bank and accounts meetings so that they understand the business and the thinking and compromises it entails.
Protecting the business & its financial performance
Lastly it is important that there is a sound business to consider succeeding to. There is plenty of advice in this area but it is critical that the business is structured to get the best out of the assets and for there to be a successful business through the generations. This will involve constant change and development as Dan has highlighted in his article. You should embrace that where it improves the business for the long term.
The power in a generational business can be immense but communication is key. Be open and honest in a constructive manner and make time for the higher level discussions and planning on the strategy of the business.
Margaret Scarrott FCCA BIAC
Director
Margaret has been in practice in the South West for over 20 years after qualifying as a Certified Chartered Accountant in London. Margaret is frequently called upon to help with partnership capital tax planning and family business reorganisations.
Margaret is a member of the British Institute of Agricultural Consultants and has been a member of the CLA National Taxation Committee, the Somerset CLA Committee, Cannington College Corporation and the Bath & West Conference Committee in the past. Margaret farms with her husband on the Somerset and Devon border. She is a keen supporter of Young Farmers and is a club leader and is on the advisory of Honiton YFC. Entertaining family and friends takes up much of Margaret’s spare time.