According to a recent survey, family businesses control a significant portion of Africa’s economy. Unfortunately, the survey also shows that most African family businesses do not survive past the founder’s generation.
How do you ensure that the family business you have built up from grass roots to the success it is now, does not fall to ruin and destruction when you pass on?
The Ackerman family business seems to be getting it right. Starting out with three grocery stores in Cape Town, they now have around 800 stores across the country and are the second largest in the country.
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More than that, the business is still a family business, with the Ackermans owning 53% of Pick n Pay’s shares, and Raymond Ackerman’s children fulfilling several senior positions within the business well after his retirement.
What are the obstacles to succession planning?
PriceWaterhouseCoopers recently released revealing statistics that indicate that only 13% of family-run businesses have succession plans implemented. Take note of the word “implemented”.
You see, most businesses have a succession plan, but too often it is merely a thought or an item on a ’to-discuss’ list, rather than a process that has been put down on paper like any other imperative business practice.
So where are family businesses getting tripped up, when it comes to succession planning, and how are these areas of difficulty remedied?
1. Alignment of family interests
Handing over the reins of your business to the next generation can be an emotional and sometimes difficult task.
As a business owner, you want to know that the best interests of your business are considered and aligned with those of your successor.
In the same vein, you will also be looking to the business as your source of retirement income. So naturally, the alignment of your family interests would be a key focus area for you.
2. Balancing of financial returns
Another area that often causes difficulties in succession planning is that of buyout agreements and financial returns. The retiring generation is likely to look to a number on a balance sheet as a way to view their interest’s true value.
What smaller family-owned businesses are often not aware of is that the business should have the concept of an earnings capitalisation model upon which to base its true value.
3. Interfamily disputes
In a family-owned business there is the likelihood of one family member’s interests not aligning with another’s.
Certain situations like the divorce of a family owner or a death in the family may add fuel to the flame, especially if the surviving spouse holds voting rights or company stock, but is not actively involved in the company.
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How do we ensure we pass on our legacy to the next generations?
1. Establish the succession plan
Putting the succession plan in place is the most important step to ensuring that your business is passed on according to your desires.
Identify your successors. This step includes selecting both managers of the company and owners of the business. Once these positions are identified, you should then identify active and non-active roles for all involved family members.
Thereafter you should identify any additional supporting roles required for the successor from family members.
2. Create a business and owner estate plan
Once your succession plan is in place, you will need to meet with the new owner/business to address the taxation implications upon sale, transfer of business ownership, death, or divorce.
Further to this you will need to review your business estate plan in order to minimize any taxes and prevent possible delays in stock transfers to remaining owners or spouses.
You will then need to arrange a buy/sell contractual agreement that minimises tax, and is fair and reflects the business’s values.
3. Create a transition plan
It is also recommended that you consider various transition options, be it an outright purchase, a gift/bequest or a combination of the two.
If it is decided that the business is going to be purchased, it is important to consider your financing options. These could include obtaining financing from an external party or self-financing from the owners who are retiring arranged on a deferred payout basis.
Thereafter you will need to establish a suitable and reasonable timeline for the implementation of your succession plan.
4. Invest in a retirement plan and insure your worth
As with career employees, you will want to ensure that you invest in a retirement plan, life insurance and even personal disability insurance – all of which will protect you and your family when it’s time, forcibly or not, to step away from your business.
It’s relatively easy to address retirement planning, because we all hope to get there and, more importantly, want to enjoy it. But life and disability insurance are equally important for the small business owners, because they protect you and your family, should the worst happen.
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It’s best to chat to an independent financial advisor about your investment goals.
You may not view succession planning as something that should be top of the agenda, but that’s a mistake.
It is not only a question of who continues your legacy, but also a question of if there will be anyone to succeed you at all.
To be blunt, if you don’t have a succession plan in place – consider following this link: SARS guide to closing a business.