How do I plan for succession?

GREG HAYES has the answers.

“My kids work in our family business. I’ve always thought they would take over the business when I retire, but a recent US study shows that many companies suffer a 2% drop in operating return on assets within three years of appointing appoint a CEO from within the family. It’s getting closer to that time. What should I be doing?”

Greg Hayes answers: Having your children take over the business is often referred to as generational succession. Generational succession is not easy and there are a lot of issues that you need to consider. Successfully planning and implementing generational succession is likely to take at two to three years.

Here are some of the issues you need to consider.

Do your children have the ability to take over the business?

This is a tough question for a parent to answer, because you’d always like the answer to be yes. You need to be fairly pragmatic in your assessment. To be successful your children will need to have a strong passion for the business, a vision for where it is going and be capable of both doing what the business requires and leading the way.

Do your children want to take over the business?

This is a good question to both ask yourself and them. Don’t automatically assume that your children want to follow you in the business. They may be working in the business with you, but they may have no wish to take it over. Don’t try and force it on them — it generally doesn’t work.

Are you reliant upon the capital value of the business for your retirement?

If the answer is yes, you need to see if the business can fund the ownership transition. Planning both the capital requirements of the business and your own financial needs is critical to generational succession.

How will control be transitioned to your children?

One of the tensions that can arise with generational succession is the control issue. Your willingness to hand over control and accept that things will be done differently, or that you may not always agree with the decisions taken, is an important element of generational succession planning.

Can you separate business from family?

This is probably more of an emotional issue, but an important one. There is not much point keeping the business in the family if that causes conflict. You need to recognise that there will be tensions along the way. It won’t always be smooth sailing.

If you can successfully negotiate your way past all of these questions then you may be on the way to commencing a generational succession. Planning for succession should involve a high degree of formality, as this will help overcome possible misunderstandings.

This means everyone should be contractually bound by formally documented agreements. Your children should have independent advice — it is a good idea to get an experienced independent adviser on board to work with you. They will understand the steps and traps.

Greg Hayes is senior partner at accountancy firm Hayes Knight. A public practitioner for over 20 years, Greg primarily works in the areas of taxation and business consulting. He specialises in strategic planning techniques, working with enterprises going through a structured growth phase.