A Good Time For Succession?
So when is a good time for succession? The answer is simple - it is when you and your successors are ready – easy to say but harder to do. It will not happen unless you make it happen. You need to plan early so that it all comes together at the right time. Finance and tax are part of the plan but it is also important to consider the personal aspects as well – roles, fulfillment and homes are really key elements to success. Here are a few pointers to help you:-
o Get an outline plan when your children are very young and plan towards it over time – are you thinking that some will succeed to the business and others may have help in other ways? Bear in mind that your children may be considering succession for their children as well if you leave the discussions until later.
o Make your investments inside and outside of the business, in line with the outline plan and keep flexibility in your planning - if you wish to split the business or estate into more than one entity, make your investments into the business so that it is capable of being split or there are roles for each person.
o If you want to make provision for other children outside the business then use investments outside the business to build the funds to do so. If, at a later stage, you wish to run a larger business together it is possible to put additional investment back into the business. However, if you have piled everything into the business it is much harder to make reasonable provision outside of the business at a later stage.
o If you want to make provision for other children from the income of the business, again plan it early so that investments and cashflow are planned and communicated to all.
o Use the power of time for investments for children who are unlikely to succeed to the business and also to build funds for your retirement – small sums of investments made early will work much harder for you than larger sums later and will be easier to bear in terms of cashflow. If you assume a growth rate of 5% per annum on a mixed investment, an annual investment of £1,000pa made for 20 years will produce just under £35,000. You would invest £20,000 over 20 years. If started 10 years later and you wanted to match the fund you would have to invest £26,500 over the last 10 years. As you can see the cashflow would be much more challenging for most businesses over a shorter period.
o Think about houses and who will live where at each stage – if there needs to be a house for one generation to retire into, plan towards it early so that it is in place. Again, this could be done over time and rental income used to fund the mortgage to pay for it.
o Ensure that you have security for your retirement. You will need to own your own house, have a secure income and capital to fall back on. Once you have this in place it is easier to let the next generation have the reins and make the mistakes that they will undoubtedly do as part of the learning process, without affecting your income and security.
o Get yourself ready for succession – that does not necessarily mean retirement and “I do not know what I would do with my time”. Plan and build a role inside or outside the business and build up to it over a period of time so that you will continue to be fulfilled. It sounds obvious but talk to your spouse about it – you will be fundamentally changing their lifestyle as well and you need to think about how it will work for them too.
o If you plan a role inside the business, try to ensure you and your successor agree defined roles and responsibilities so that you are clear who will be responsible for what and where you have the freedom to make decisions in your area of management. Agree a process for areas that will require joint decisions.
o Try to help your children have a passion for what they want to do – if it is succession to the business ensure that they see you enjoying it and want to be part of it. Spend time with them to foster their enthusiasm at a young age – try to get them involved in the interesting bits (for a child!) – this is much more difficult when all rural industries are bigger, more complex and not without danger and takes effort. It is easy to be busy or stressed and then find that your family are not so enthusiastic about the business as you are.
o Ensure that they get the broad training that they need to succeed – get experience in other businesses/countries, encourage them to get educated, to build a network for life and to keep ahead of technological changes. Get them involved in the wider industry if you can - membership of the NFU and CLA, industry discussion groups, processor meetings and Young Farmers can all broaden industry understanding and of broader economics.
o Encourage new ideas and allow them to bring them to the table and properly assess them.
o Give them experience in the business - not just in doing the job but also in the how, why and when you do the job so that they have the understanding of management decisions. Give them experience of managing staff as well – probably the most difficult area of them all and with little technical training. It takes longer to build the experience so start early and coach them and build their skills.
o Think about getting someone for them to talk to independent of your business – someone who they would respect and who would be a good role model could help them develop.
o Involve them in finance meetings so that they understand the business and the demands on the management.
o Talk to them about the broad succession plans and plans for the wider family so that they help you manage the business accordingly.
Lastly enjoy the process of spending time with your family and seeing them develop and grow – it should be fun …. most of the time!
Margaret Scarrott FCCA BIAC
Margaret Scarrott FCCA BIAC
Margaret has been in practice in the South West for over 20 years after qualifying as a Certified Chartered Accountant in London. Margaret is frequently called upon to help with partnership capital tax planning and family business reorganisations.
Margaret is a member of the British Institute of Agricultural Consultants and has been a member of the CLA National Taxation Committee, the Somerset CLA Committee, Cannington College Corporation and the Bath & West Conference Committee in the past. Margaret farms with her husband on the Somerset and Devon border. She is a keen supporter of Young Farmers and is a club leader and is on the advisory of Honiton YFC. Entertaining family and friends takes up much of Margaret’s spare time.