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Getting ready to transition your family business

Dec 04, 2018
Getting ready to transition your family business

The act of moving the family business from one generation to the next is a life long journey.  It is affected by the location of the heirs (Perth or international), the capacity of heirs and their relationships within the family.  Understanding, educating and helping the next generation to prepare to control the family wealth and the family business is a long and slow journey.

A few key items to consider can make a big difference when transitioning your family business.

Recognise your family strengths

Every member of your family can contribute to the family business and the family wealth in some capacity.  Some family members might have exceptional negotiating skills, other family members might be active social contributors and some family members might be less engaged in the family affairs than anticipated.

If you are considering a transition it is OK to also recognise that some children should be involved in different areas based on their skills.  And the recognition that some children should not be involved in the family business or the family office (or they should be a passive observer) can be challenging for business families.

As family business advisors we have seen that successful transfers almost always occur when the family does a transition based on skills rather than relationships alone.  Simply because a child is the oldest does not mean they should head the family business.

Further, if a child has strengths that can help the family business it is also fair to provide them with training to make them excel and provide considerable value back into the family.  And the mere act of giving exceptional children training (like any employee) does not need to be done in accordance to a “me too” attitude by other children.

Getting the financials ready

It is fair to say that a large part of any family business succession is attending to money.  And yes it is also fair to say that money is not everything to a family business succession – but it is always a significant part.

If the succession of a family business will require external bank lending a clear documented transition that is articulated to banks and lenders is critical.  This position should be outlined to the bank ideally 10 years in advance so the bank can prepare and give feedback on their appetite for the transition approach.

This long time frame also gives the family business time to alter the business so that the bank will be prepared to assist in succession at the appropriate time.

The transition of a business and transfer of control will almost always involve the movement of assets.  And this will most likely trigger tax outcomes.  A family business advisor should dovetail the family business succession strategy with the family business tax strategy to ensure that they are aligned.

Communication

A healthy family will argue.  And making sure that conflict is welcomed and managed in a way that best fits the family is a critical part in a successful transition.

As a specialist practice in family business advisory the most spectacular unsuccessful transitions occur when families never argue.  If the conflict in a family is suppressed so that nobody can express an opinion that differs to the head of the family – these issues will normally come forward when the family head is no longer present.

If the family business strategy is slowly formulated and developed this process will include talking to family members both individually and as a group.  Such a discussion process is often best achieved with an outsider to “push along” the process and also ensure that family meetings are kept to task and do not become a social event.

The development of a transfer document will include matters including how family members will resolve conflict, how family members communicate and how different people will be compensated in different ways for their contribution to the family business.  And conflict could range from a simple “sharing” of Christmas times to dealing with a divorce with a member of the family.

Getting outsiders on board

This same transfer document that is built for the family succession is also successfully transfer to the document that is presented to lenders for financing purposes.  And it is also the same document that will dovetail into the tax, remuneration and structuring process that is critical for the family business governance.  And this document will be a critical piece to present to lawyers who are helping with the preparation of your wills and enduring powers of attorney.

A successful transition is difficult to achieve.  However by using a network of independent advisors who are committed to family businesses you will be able to learn from their experience and ensure that the family legacy is transferred at a point in time of your choosing in a way that works best for the family.

 

 

 



Category: Family Owned BusinessFinancialPopular

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