NEWS EXTRA SUCCEEDING WITH SUCCESSION
Adam Bernstein looks at how family businesses need to plan for the future in terms of who’s going to be running the show.
ACCORDING TO THE Institute for Family Business (IFB), two thirds – 4.7m in total – of UK businesses are family owned. Crucially, the IFB believes that around 100,000 of these firms change hands each year for a number of reasons – retirement, insolvency or death.
Difficult discussions David Emanuel, partner at law firm VWV and head of its Family Business team, considers succession issues to be the elephant in the room: “Current and future generations often find it incredibly difficult to talk about succession, and can make assumptions about each other’s intentions which lead to misunderstandings and tension.” He points to a recent PWC Family Business Annual Survey suggests that only 30% of family businesses make it to the second generation, 12% to the third, and just 3% a further generation.
Relationships can exacerbate the problem. Nick Smith, a family business consultant with the Family Business Consultancy, says families need think about relationship dynamics: “Will my children want to take the business over? Are they capable of running it? Is there room for more than one child? Will they fight? How do I deal with ownership if some want to work in the business and others don’t?”
The main issues Every business needs a succession or exit plan. In the case of a growing business, family or not, there will also come a point when the current owners need to hire external talent to maintain growth. There are two fundamental issues for Emanuel. Does the current generation want to retire, when, and on what
terms? Conversely, does the next generation want to take the business on, and if so when and on what terms? Smith wonders about an inability of the senior generation to let go of the reins of the business – “this can be for a variety of reasons including a lack of faith in their successor, a belief that only they can steer the business forward, or a fear of what life after the business holds.” Interestingly, Emanuel sees many established family businesses wanting the next generation to forge careers of their own: “The decision to join the family business should be a conscious one, rather than a sense of obligation, and it should bring with it the skills and experience learned elsewhere.” For Smith, there is a tricky balance to be struck between creating opportunities for the next generation, and generating inappropriate expectations so that family members who, in reality, are neither suited for or motivated towards life in the family business, find that they spend their working life in the family firm.
If the family aren’t committed to the future the best answer is likely to be to sell the firm. And it’s for this reason that Emanuel says advice on value and likely exit options from an experienced
Current and future generations often tension.
“ ” March 2018
www.buildersmerchantsjournal.netMonth 2018
www.buildersmerchantsjournal.net
corporate finance adviser is necessary. Smith says families often choose to sell to a buyer who they believe is most likely to preserve the culture and ethos of the family business; often another larger family owned company.
The unexpected Death and divorce are just as obvious risks for a family business. The death of a co-owner can lead to a loss of vital skills and experience, as well the risk of shares passing to an unknown quantity. Divorce principally presents the risk of shares passing outside the family, or a need to sell shares to finance a divorce settlement. “Families must think about what to do in these circumstances and consider a shareholder’s agreement to cover these issues. This might be considered unromantic but it’s better than having the divorce courts decide the fate of the family business.
Sale and no pass-down But once the sale decision has been taken Emanuel says the family should take advice on the options. He advises seeking recommendations but notes that the advisers that will be engaged will be dictated by the size and complexity of the business. Further, he says to “think hard about engaging people who work principally on a success fee percentage commission-only basis - the overall cost may be higher, although you may be insulating yourself from costs if a deal doesn’t go ahead - but there can be a conflict of interest for people remunerated only if a deal goes ahead.”
One thing that will ease the process is to undertake some financial and legal due diligence
as if the seller were a buyer, to identify any gaps or issues that may affect price or saleability. Internal due diligence also means the firm is prepared for what the buyer’s lawyers will be asking for in due course.
Seeking a valuation Businesses will generally be valued on either the value of net assets plus goodwill; a multiple of earnings; or discounted future cash flow.
“In between the extremes,” says Smith, “there are a raft of approaches and solutions including discounted prices and stage payments. There are also more complicated solutions such as freezer share mechanisms, where no sale takes place but the senior generation lock in the current value of their shares to be left to the wider family and the next generation family members working in the business receive the benefit of any growth in value during their time in charge.” It’s important to remember that in a succession situation, where one generation is passing the business to the next, and the retirees are expecting a payment of value to cover their retirement ambitions, deferred payment risks may be looked at differently depending on the circumstances – families will be more trusting.
Tax planning
Tax planning is important and should always form part of the decision-making process but should never be the main driver. That said, no-one wants to hand over, by way of inheritance tax, 40% of the value of what they have worked for. As Smith says: “the most important point is what is right for the family members and the business itself.” BMJ
9 7
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52
