Growing or going? What’s next for your business?
Succession planning can be daunting- but if you prepare yourself for what’s ahead and follow an established process, you’ll be better able to navigate your way through the transition.
Here, we lay out some key things you should consider, give an overview of the most common succession models, and offer some top tips for succession planning.
Want more? See the below Succession Planning presentation delivered by Rohan Dunsdon at the Growcom Workplace Essentials Webinar in November 2021.
What to expect? Key considerations when embarking on succession planning
Typically, the main issues faced by family businesses who are exploring succession planning fall under the following categories.
Fairness versus equality: Within most multi-generational businesses, there will be parties who are involved in different capacities. One of the biggest challenges of succession planning is figuring out how to balance competing interests. You need to remember, what is fair (and sensible for the business) will not necessarily be equal.
Illiquidity of assets: Generally in agricultural and horticultural businesses, the assets are farmland and equipment. Often, these types of assets are not very liquid – for example, splitting up landholdings is not as easy as splitting up stock or inventory.. Illiquidity can make succession planning tricky, so it’s important to have a clearly developed plan from the start.
Getting the timing right: Sometimes, the succession process can be sudden and stressful due to death or serious illness of a business owner. Other times, coming to an agreement on when the succession process should begin can be a sensitive subject as, the older generation may want to keep a hold of the business for as long as possible, while the younger generation may want to take ownership as soon as possible. Open communication and negotiation is the key to keeping the conversation moving in a forward direction.
Having something to move to: Off-farm assets often provide a stepping stone for the family members exiting the business. However, after years of drought and tough conditions, a lot of rural businesses do not have off-farm assets due to tight cashflows. Typically, cash has been reinvested within the business rather than in other assets. Planning ‘what’s next’ for those exiting the business is just as important as planning the future for those taking the reins.
Restructuring costs: Even though the succession plan may ‘keep it all in the family’ – it’s still a business transaction. Capital gains tax, stamp duty and general income tax are just some of the considerations that need to be thought through. There are some concessions available – so be sure to speak to your advisor or accountant early to figure out what may be relevant to you.
Managing risk : The separation of your business from your assets protects all parties involved in a succession planning process Also, reviewing your business structure is imperative to ensure that the business you are transitioning is appropriately set up for the next generation. It’s never too soon to look at your options.
Five important succession models
Like everything in life and business, there are many ways to approach succession. It is important to be aware of the different succession structures.
- Integrative model: This is probably the most common within agricultural and horticultural businesses. The goal of the integrative model is to provide flexibility to have multiple family members within the business. Family members may have different roles, but it is called the integrative method because every family member is involved, irrespective of their role.
- Representative model: This model is aimed at continuing as a family-owned business, but transitioning it so that there is a key representative/s across the group of shareholders or interested parties. This can ensure that the family maintains control, but the business still functions effectively and efficiently. For example: a family of six would choose one representative for the business. They may be part of the family, or an external party.
- Selective model: This model is based on the principle that what is fair is not necessarily equal. It generally involves the current owner designing the succession in the way that most ensures business continuity. The new ownership may not necessarily fall to the next generation of the family.
- Re-foundation model: The re-foundation model can come into play unexpectedly. It’s generally when two or more generations are working within the business – perhaps due to a significant event such as an accident or health scare which means that help is needed to run the business. When this arrangement turns out to be a longer-term solution than originally anticipated, it can cause friction if it’s not managed from the start. Managing expectations and clear communication are vital in this scenario.
- Transactional model: This is probably the most black and white succession model. The key driver in the model is achieving an economic outcome. Essentially, it involves the older generation succeeding the assets and business to the next generation for a price. The assets are transferred under contract.
Tips for developing your succession plan
With the key considerations identified and the options for approach understood, it’s time to get on with succession planning. Some key tips to keep this process moving follow:
- Start conversations early among the family and business group. Talk about what the longevity and growth model of the business could look like.
- Determine what a successful succession plan looks like for each party.. You may have different values around what this success looks like, so it’s important to put it on the table early.
- Set ground rules. These may be around establishing expectations on how to show respect when it comes to communicating with family members in meetings.
- Introduce a consultant or a mediator to guide the process. This should be an unbiased third party. They will be the ‘voice of reason’ in tough conversations.
- Be flexible. If you go in unwilling to change your ideas, you may doom the process from the start.
- Make sure there is a balance between maintaining momentum and not rushing the process.
Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.