Succession: Planning for the Worst, Hoping for the Best
Everybody appears to be talking about succession planning and it is all too easy to become numb to the advice which we are all getting from our bank managers, solicitors, accountants and land agents. Managing Partner, Robyn Peat, breaks it down.
So what is succession planning and why is it important?
The heading for this article could easily have been ‘A Stitch in Time Saves Nine’ however my heading ‘Planning for the Worst, Hoping for the Best’ cuts, I think, to the nub of the advice to have succession planning in place.
But why do we need it?
If you don’t plan for what you want to happen it probably won’t – that is to say what you want to happen will not, and when I say you I mean collectively; families, business, etc.
In terms of family business and generational businesses the key is who is going to end up with control of the business and secondly and possibly the same, who will own the business assets.
Families and farming families often find it incredibly difficult to in the first instance, be clear on who they want to end up running the business and owning it.
In these situations the unforeseen often occurs; no only interfamily strife, fighting and significant legal costs and stress but also the collateral damage of generational fall-outs and unforeseen tax bills.
So how can all of that be avoided?
- Work out how the family / the business is going to transfer to the next generations. The business may for example decide that for a number of reasons the plan isn’t that the assets are passed on to a member or a group of family members and everything will be sold and divided out or partitioned at a point in time. Whatever the decision this will probably be the culmination of a significant amount of discussion and preparation. It is in this process that a trusted advisor or someone coming in from the “outside” without any preconceived ideas or allegiances can help guide family decision.
- Remember that a equality doesn’t equal fairness. Sometimes depending on what the objectives are, assets should not be divided unequally. If a clear objective is that the farm will continue often if the assets are divided equally between all of the family members then there won’t be sufficient capital or a viable business. The guide needs to be a high level objective of say carry on the business or divide up the capital – rarely can both be achieved.
- Don’t let the tax tail wag the dog. Tax is really important and should follow the objectives rather than guide them. All too often schemes are set up to purely minimise tax but don’t actually achieve the objectives of the family.
- Do the detail. Once the headline is understood then the detail must be delivered and that detail often delivered by a team of advisors drawn is essential. There are many other key steps in the process however it is important not to over complicate the process. The essential steps are for example – what are the tax consequences of the plan and therefore values need to be scoped out and evaluated and how can the cash flow be managed and working capital raised – detailed business plans are required .
There are many tools at hand to balance the competing objectives of family members e.g.:
- Partition of land subject to overages to ensure a fair division of development value
- Payment of legacies
- trusts and company structures
Fundamentally however succession, planning is about avoiding unnecessary conflict and ensuring that what is wanted is delivered without unnecessary cost and conflict which is all too easily the outcome from a recipe of sibling rivalries, land capital and farming families.