At Sparke Helmore, we have many clients in their fourth and fifth generations of long-held family businesses. It is our experience in acting for these families that communication, planning, and structuring are essential elements of a successful transition.
One of the most common questions we receive about longer-term planning for families who want to work through transitioning a business is – where do we start?
Set out below are some of the main issues that need to be considered in intergenerational business transition planning for family business. It is not exhaustive but is intended to highlight essential issues that need to be considered to ensure the process can progress toward a successful outcome.
Communication
One of the main issues that lead to disputes within family business is lack of appropriate communication within the family. Communication in any family can be difficult and it requires an understanding by each family member of the needs of each other family member. Being prepared to discuss sometimes contentious topics in an open and non-judgemental way is key to managing expectations and progressing the business so it can remain viable for the next generation. It is essential to avoid potential miscommunications by considering--and where they exist dismantling--communication triangles within the family and the business.
Family and Business Communication
Don’t do this:
Think about this:
Thinking about the communication patterns that can trigger problems can assist in moving towards more successful conversations. If that seem like an impossible challenge, consider engaging an independent facilitator to assist with family meetings and to help move past difficult communication road blocks.
The plan
What is frequently not given appropriate consideration is that planning the transition of any business, including a family business, involves a real and achievable plan being put in place. Succession plans should be part of the business plan. The following graphic is based on data relating to family business in the United States, but we note the statistics are slightly worse in Australia.
Business planning is an essential ingredient of running a viable family enterprise. A transition plan is something which should be included in the overall business plan at the outset although it will need to be evolutionary in the sense that it could be carried out over time. It will need to be flexible enough to adjust with changing needs and circumstances of the business and the family.
Assets and Income
Ideally, long before a transition of the business commences, an understanding of the importance of both business and non-business assets and income needs to be considered. The asset pool needs to be sufficient to secure retirement of the parents whilst also enabling a viable business opportunity for the next generation.
Parents must be able to retire comfortably. To know what that will mean from a financial perspective, parents need to identify how they want to live, and what they want to do in retirement to enable the cost of that to be ascertained, ideally with the assistance of financial advice. If assets outside of the business (investment property, shares, superannuation for example) are insufficient, the earlier that is identified, the easier it will be to build retirement assets away from the business. If that is not achievable, the next generation needs to have their own financial advice to determine if, once the cost of retirement is funded, the business is still viable.
Identifying the asset pool, the long-term plans for business viability and sustainability, and the needs of the incumbent generation in retirement at an early stage, and reviewing these consistently, will help provide a much smoother path for the transition of a family business.
Fairness
Trying to be fair to all members of the family is obviously a part of good business transition planning but is often fraught with difficulty where there a few or no assets away from the business.
Different people have difference interpretations of fairness, especially at different life stages. If the holder of the assets, usually parents or an entity controlled by parents, intends to share assets between all of the next generation, it is essential that proper advice is obtained about the viability of the business for more than one family. This is particularly important before a specific child invests their entire future and their family’s future in the business. Early retirement planning is crucial for this reason. With sufficient assets outside of the business, capital in retirement may be enough to leave an inheritance to children outside of the business that will assist them financially without compromising business viability. It is also important not to simply compare asset value when considering inter-generational family business enterprises.
A child in the business may technically receive higher value assets, but their cash flow may be more at risk, and they will have to work very hard to generate that cash flow. If the assets are intended to pass on to a future generation, they will never have access to the value of the assets in question. Children outside of the business with a more liquid inheritance won’t have to work for their returns and are likely to have a much higher rate of return. They will also have more flexibility about what to use their capital for, even if it is lower in value. Some of this if course depends on the scale of the business. Larger enterprises may be able to be more successfully structured to support multiple family members through the generations.
Revenue issues
It’s important for businesses to consider revenue implications during the succession process. There can be great complexity during the transaction process because an incorrect plan put in place to progress a family transaction can render huge liability for taxation or duty whereas another correct method will successfully and legitimately complete the transaction without the same revenue liability. In this respect, seeking taxation advice well in advance of a transition is vital, as is being very careful when considering a transition of management of the business to the next generation without a transfer of capital assets. If effective retirement has occurred well before a transition of assets to the next generation, capital gains tax and duty concessions may no longer be accessible.
These are just the basic starting issues to consider. A proper transition plan takes time to develop and evolve and requires the assistance of a team of advisers to be completed successfully.
By Kylie Wilson, Partner, Sparke Helmore Lawyers
Since 1882, Sparke Helmore has been providing legal services to Australian businesses. That represents 140 years of success through bringing our experience and knowledge to our clients. We are a truly national full service firm with offices in all mainland capital cities and strong connections throughout regional Australia. Our strong history, underpinned by extensive experience means our firm is well placed to assist our clients to achieve the best business results across all phases of the business lifecycle, whether this be acquisitions and disposals, land related dealings, business structuring, intergenerational succession, intellectual property and technology matters, cybersecurity, employment, work health and safety or taxation.Since 1882, Sparke Helmore has been providing legal services to Australian businesses.
