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"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to changeDarwin"

Succession planning in a small business




Why would your children want to take over your business?

Every evening, as a business owner, you probably go home and chat to your family about business or it may be that your children just over-hear you to chatting to friends and other members of your family about work.  Over the years, your kids just soak up your knowledge about how to run a business.  Sometimes they even go further and develop their own theories about what you are doing right or wrong, especially if they help out during holidays. 

The point is that your kids grow up with so many more advantages, in terms of knowledge and second-hand experience, than say the children of people who have not run a business.  They also understand that vital piece of knowledge that, when you are the owner, the buck stops with you.

If these kids go to work for someone else, it is often the case that they are simply more driven to do a good job, because they see things from the viewpoint of the employer, BUT they may also get frustrated, knowing they could do a better job and unhappy at just earning a standard wage, instead of earning a profit when they do a particularly great job!

Working with family

However, it is not all plain sailing.  It’s tough working with the older generation in a family business.  Those of us who’ve done it have all heard the repeated phrase – your father/grandfather/mother would never had done it like that!  I’m not writing that book right now but I would suggest a rule that each party treats the other with respect, like any other employer/employee relationship and any heated discussions take place behind closed doors. Personally, I think the opportunity to work elsewhere first, is a really good idea, to learn their skills and appreciate what it is like to be “just” an employee.  It is also a good idea to ensure that the younger generation have their own ideas and skills, perhaps some very useful ones, to bring home.

It’s a clever combination of remembering you’ve potentially got the most important employee you’ll ever employee but also the one who is the most difficult to manage. 

Formal training is essential and it is vital to put the effort into development generally.  A friend of mine brought his son into the business and gave him all sorts of practical training but forgot to teach him how to read a balance sheet.  Whilst you may have just started your business from scratch, learning from all your mistakes the hard way, why not afford your successors a better education and avoid those mistakes, whether in the form of training elsewhere, a degree, and MBA or something like the Institute of Directors’ run degree?

Status

I believe there are two risks: firstly, that the child of the owner is treated like an underpaid, form of cheap labour and just treated disrespectfully; or, the heir apparent is given too much kudos without having earned it.  If you look upon the protégée as a serious trainee manager, with formal status and training to match, and treatment based on working their way up the ladder due to hard work and aptitude, you will have it about right.

Sometimes, it will simply just not work out.  If their heart isn’t into it, they are better off following their dreams elsewhere.  If they have the commitment but lack the talent, then live with the fact that they will find another role within the business an perhaps end up the best accountant/head of technical/ IT manager you ever had. 

Inheritance

From the legal perspective, I believe it is essential to get succession laid down in writing.  For instance, if you have a house worth £500,000 and a business worth say £450,000 and two children – one of whom works successfully in the business and helps run it and one who doesn’t, then leave the house to one child and the business to the other and tell them what you are doing and why.  You can always set funds on one side to make up any shortfall, remembering that it’s never too late to take tax advice on how all of this is going to pan out after your death.

Another strategy is to try and set aside cash to even out any differences.  This makes sense anyway and it is a great discipline but hard work at the same time you have a young family and you are starting a new business, so keep in mind and address it when the time is right.

Therefore, your will (and your powers of attorney) need to reflect these points.

Rewards

Have the discipline to set up a formula for separating ownership/investment in the business for relations and pay dividends and a salary appropriately to different children, some of whom are both shareholders and employees and some are just shareholders and don’t work in the business.

Structure

I like the idea of bringing a family member into ownership step by step.  You can use a different class of shares (possibly non-voting) and a good shareholders’ agreement to give them initially just a few shares and ensure they are signed up to the shareholders’ agreement and begin to understand the dynamics of share ownership.

You could use the same structure, in the event that you wanted to leave shares to more than one child but they must understand that being an investor is different to running the business.  Therefore the rewards as an investor (dividends) are different to the rewards for an owner/manager (dividends, salary and possibly even a bonus and other perks).

Advisers and their role

It is important that you work with advisers who understand the dynamics of the situation and have the strength to deal with parents and children fairly, with a view to “bringing on” a future business leader.

If any of these points are relevant to you, please call us on 01202 888300 to discuss.


Article Date: 25/09/2019

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