Family Business Succession Planning
Almost a quarter of New Zealand business owners – representing more than 90,000 businesses - were over 55 years old in 2013 according to Statistics NZ and a recent Xero report. And these figures have been increasing significantly.
The implication? A coming tsunami wave of business sales over the next 10 years. The retirement lifestyles of tens of thousands of Baby Boomers potentially hinging on the final outcome of these business exits. A significant portion of which relate to potential transfers to the next generation of family members.
If you’re in this age zone and transferring your business to family is an option, then here’s some things to think about:
Start the process now
Now is the time to start. The process of preparing your business for an orderly transition to family is complex and takes time – at least 2 years and often considerably longer.
Retirement from the business you’ve built up is an emotional decision. Maybe you’re a bit reluctant to think about life after business. Or perhaps you’re thinking that the financial and related implications of retirement might mean a major change to your lifestyle. It’s factors like these that I’ve found tempt far too many into simply doing nothing. The effect of this inaction though, can be especially frustrating for adult children working in your business.
Don’t run the risk of having to put together a hasty exit strategy if you run into unexpected health issues, or hit the wall, or another life event issue comes along. A hasty exit could mean a much less viable business for the incoming family member, even to the point where closure or a sale to a third party become preferred options. All this coming on top of the risk of receiving a smaller, or even no retirement nest egg at all when you finally exit your business.
Get good advice
The complexity of the questions you’re likely to confront means that a variety of independent advisors are needed. This may include legal, business valuation, accounting, tax, personal financial planning, business advice, and even mediation in more extreme cases.
Of these, a business advisor is often best equipped to assist you with overviewing the planning and implementation.
Consult with family
Get family agreement early on. Aim for a plan that’s transparent and fair for everyone - regardless of whether or not an immediate family member is closely involved in the business on a day to day basis. Allow time to deal with emotions that can often run deep in family businesses. For example, when considering whether or not to give one sibling “favoured nation” treatment such as interest free vendor finance in order to complete the purchase.
Commit your family business succession plan to writing. Such a plan may include:
- The purchaser(s) and their ownership entities
- Whether or not there will be a full or a staggered sale
- Transfer date(s)
- How the price is to be determined
- Any special financing arrangements
- Interest and repayment terms on amounts due to you from the business
- Your work hours before and after the transfer
- Goals and objectives for your business
Make your business more valuable
If your business presents as a sound candidate for family business succession, then its key features are likely to include:
- solid year on year profitability
- a sound long term economic outlook for the industry in which you operate
- well developed, well documented systems right across your business that are not overly dependent on your own day to day involvement operationally. Your business is therefore able to cope with your absence for at least, say, a two-month period.
- a family heir apparent with the necessary management skills already working in your business
Features like these make it easier for the buyer to manage the business after the sale and increase its chances of longer term success – regardless of whether or not you choose to remain involved afterwards on a part time basis.
But in reality, most businesses don’t have all of these features. It may even be that your business’s performance has weakened in recent years because you’ve deferred making key changes as retirement approaches.
It’s highly likely then, that your business needs more work during the family business succession period to develop its strengths and fix weaknesses. Working on these issues with an experienced business advisor helps to hold you more accountable for making the changes and monitoring progress generally, as well as to give you independent advice during what can be a most challenging time.
How vital is your business to your personal retirement plan?
Are you one of the majority of Baby Boomer business owners that don’t seem to have a clear succession plan – even where family members are showing an interest in taking over? And are you one of the large number of small business owners who, because they’ve preferred to reinvest in their business over the years, have no super fund or other retirement investments outside their business?
If you are, then a well executed family succession plan offers you the potential to release a worthwhile retirement lump sum from the sale – as opposed to a worst-case scenario of nothing at all…and the satisfaction of passing a healthier business with a greater chance of long term survival on to the next generation.
AJS Advisory® provides on call independent business advice and support that includes helping you and your family to establish and monitor an effective Family Succession Plan for your business. Contact us now for more information.