RSS feedsWhen the baby boomer generation came of age, they created a wealth of family-owned businesses and, with many now moving towards retirement, look set to generate a wave of sales of owner-managed companies the likes of which has not been seen before.
Research suggests that more than 50% of family businesses expect a leadership change by 2013. Around 30% of these businesses have a chief executive who is over 60, with an average age of 54.
Traditionally, this market has not planned extensively for succession and when they do turn their focus to a sale or restructure it can put a tremendous strain on family relationships. It needs careful handling and preferably the support of specialist advisers in the owner-managed SME sector as well as someone experienced in dealing with families in scenarios such as these.
The old givens as to inheritance and succession don’t apply any more. For example, no longer is it assumed that the eldest son will inherit the business. That is now being challenged by the younger members of the family, including daughters.
Changes to the tax regime announced by the chancellor in the pre-Budget report, and to be introduced this month, will increase the tax liability on the sale of a business by up to 80%.
Deciding to retire from a business in which you have spent 30 years building up is never an easy decision, but it is often even more difficult and complex when there is either an expectation from the family, or a desire on the owner’s part to pass it on to the younger generation.
Traditionally, the family business was passed on without money changing hands. But with the poor performance of the pensions and stock market investments in recent years, many owners are looking to the sale of their business to deliver lifestyle finance in retirement.
Keep it in the family
That doesn’t mean to say they will look outside the family for succession, but it might be that the younger generation may need to source appropriate finance. A formal family management buyout can work well on all levels.
The banks and funders might require some management change even in a family, company change can be healthy for a business. A balanced and experienced management team can be an enormous boost for a less experienced business owner especially one who also has the pressure of following in their father’s footsteps and taking the business into its next era.
There are some fundamental questions that should be asked before offering the business for sale to the family. Not least, is it right for your client on a personal level and for the business in the long term? Only around 30% of family businesses survive into the second generation, this drops to 12% into the third and just 3% after that.
Ideally, advisers should provide independent advice on these issues. They should challenge their clients and guide their thinking it’s difficult to assess these issues in an objective way when you are involved on a personal level.
Then there are questions such as does the next generation want the business, or do they feel obliged to follow in your clients’ footsteps? Also, who is best placed to take up the mantle? Inherent in it all has to be a desire and plan to reduce conflict and maintain personal relationships balanced against commercial viability.
There are many ways of addressing these issues along with dealing fairly with those who are not involved in the business and, of course, limiting the tax liability along the way. Partial exit is an option, ensuring that the transition to the new generation is done in a controlled way.
Letting go
A final transaction is then both less of a culture shock and less of a risk, but will involve a sea change of attitude on the part of the owner. Your client must recognise they are no longer in charge, and have to cut the team free. Their vision may not be the same and their skills, while perhaps different from your clients, are not necessarily inappropriate to drive the business forward.
Above all, my advice would be to be sensitive, obviously, but think objectively, communicate well and plan as far in advance as you possibly can.
Rosemary Penn-Newman is head of corporate finance at Fanshawe Lofts
