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| Transitioning a Family Business Can Be Fraught |
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By
Stephanie Duffy & Mairead O’Grady - Russell Brennan Keane
May 3, 2011 |
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A smooth and successful transition of the business from one generation to the next is often a key aspiration of the family business founder. However, according to Stephanie Duffy, Business Psychologist at Russell Brennan Keane, Chartered Accountants and Business Advisers, achieving this goal can be fraught with difficulties if not planned well and planned early.
Benefits for the Business
Research has shown that less than 30% of family businesses survive into the third generation. For the minority that manage succession successfully it can bring many benefits to the business such as continuity of values and approach, strong identity and commitment, greater loyalty and flexibility. However, if succession is not managed well, it can cause long-term conflict within the business and the family, and ultimately lead to the demise of the business and maybe even a split in the family.
Decisions
A number of major decision points that can impact on family harmony are connected to succession issues:
The entry and exit of family members:
• Who wants to work in the business?
• What might their role be?
• When do they join?
• Do they gain outside experience first?
• What if they are not suitable?
Leadership Succession:
• Is there an obvious successor?
• Is he / she interested in taking over?
• How will the rest of the family react?
• When is the right time?
• What training / coaching / mentoring is needed?
• How will the outgoing owner manage his / her exit?
• What role will s/he play post exit?
Current Economic Environment
“The current economic environment brings both challenges and opportunities to the Irish family business,” said Stephanie. “These uncertain times have put pressure on family business owners to stay on longer in the business, either due to the erosion of their wealth or to assist the business to survive. The current business environment has also forced companies to focus on short-term survival at the expense of longer term planning.”
Another feature of the current times is the pressure on businesses to employ family members even if they are not suitable for roles in the business – this may have far reaching consequences for succession issues in the future as once they join a family business it can be difficult to get family members to move out of the business if they are not suitable and they may bring a sense of entitlement to future ownership or they may block another suitable successor.
Tax and Timing
Whether now is the right time to transfer the business will depend on the business itself and family circumstances – however, according to Mairead O’Grady, Tax Partner at Russell Brennan Keane, now is the time to start planning for two main reasons.
The first is the fact that the value of most businesses have fallen significantly in the current economic climate which is perhaps the only silver lining as the lower the business value, the lower the associated tax cost of transferring it. The second driver is the stated intention of the last Minister for Finance to restrict the existing generous suite of tax reliefs available for transferring a family business. Given pending budget measures, this might come sooner than expected.
There are a number of tax planning mechanisms that can be implemented as part of the transfer and, whilst owners will have a number of concerns when contemplating a transfer, there are other mechanisms that can be put in place to ensure that they continue to have a significant input into the business following the transfer and that adequate provision is made for them out of the business in the future.
Achieving Family and Business Harmony
Building a successful business takes hard work and sacrifice, and seeing it successfully handed over to the next generation can be very rewarding for the business founder. Protecting family harmony is a major concern that influences decision making processes and can cause some owners to avoid tackling the succession issue, but putting succession planning on the long finger is storing up problems for the future, according to Stephanie. “Succession may be forced on you by an illness, an untimely death, the unexpected exit of potential successors, or other unforeseen events. This can then lead to conflicts, rivalry and a lack of trust between family members.”
Stephanie recommends bringing in a neutral advisor to assist the family business in the complex succession planning process. In the short-term this will bring peace of mind to the owner and family and in the longer term it will help to secure the legacy of the family business into the future.
To discuss the issues in the above in confidence, please contact:
Stephanie at sduffy@rbk.ie or tel 01 6440100.
Mairead at mogragy@rbk.ie or tel 090 6480600
96 Lower Baggot Street,
Dublin 2
Telephone: +353 1 6440100
Fax: +353 1 6440190
Email: info@rbk.ie
RBK House, Irishtown,
Athlone, Co Westmeath
Telephone: +353 90 6480600
Fax: +353 90 6478083
Email: info@rbk.ie
Russell Brennan Keane is one of Irelands leading business advisory and accountancy firms. With 50 years experience providing professional advisory services to a range of clients in the mid to large corporate market in Ireland, from offices in Dublin, Athlone and Roscommon.
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