For business owners, succession planning can take many forms, and this guide covers some of the major considerations. Whilst not a complete guide, we cover a range of succession planning strategies, considerations for business owners and what steps can (and should) be taken to minimise complications into the future. We understand that succession is not just a will, but a complete analysis of a family group, their assets, their taxation position and ultimately an articulation of their plans for the future. It can be a discussion that families often avoid, but with beneficiaries becoming older and the potential for generation skips to occur, it is becoming more and more important for family groups.

Succession planning strategies include understanding the long-term objectives of the family group, considering variables within the family group and following consequences to mitigate any potential future problems.

In order to properly develop a strategy, it is necessary to take a wide view of the family group, to find the objectives of the individual members and to articulate the proposal so that there are no surprises between family members. It becomes a narrative, a communication and a process that involves not just the first generation but those impacted by the decisions that will ultimately be made.

Issues to consider

Understanding that all families are different and what the overall objectives are, a succession plan needs to be flexible as things change. This is something that starts at the commencement of a business and continues throughout the ownership period. Undertaking a succession planning strategy commences with understanding the overall assets within the Group, and what the intention is for each.

When developing succession planning strategies, more information is better than less. There are multiple moving parts that will need to be considered. Decisions need to be made on an informed basis and understanding not only financial but also emotional impacts is an important consideration that cannot be discounted in the development of the structure. A family group making succession planning strategies on limited information is fraught with significant risk of the structure failing to be sufficiently robust.

There are always complexities within the family group, and we recommend early engagement and conversations to mitigate the risk of future dispute by understanding the positions of each family member and considering their input into the decisions that have been made.

Some issues in determining succession planning strategies include:

• Who should control assets

For some business owners it is a difficult realisation that they do not technically own their assets and instead they are owned or controlled by a trust. Who owns what and how this is controlled is an important aspect in creating succession planning strategies.

• Who works in the business?

For family groups with business assets, there needs to be recognition of the children working in the business against those with other careers. Many disputes are forged through a misunderstanding of the family business assets, the sale of them to working children or the passing of them in death. Early communication and succession planning strategies improve the position to reduce the risk of dispute.

• What are the liabilities of the business?

Taxation is a core aspect of a business within a family group and often tax planning has been undertaken without considering the overall succession planning strategies that have been implemented. Other liabilities may include cross collateralised or secured assets which impact the overall financial position of the family group.

• Can the business afford the next generation?

A question that often arises in succession planning strategies is whether the family group can afford the next generation. Does it have sufficient financial resources to provide for multiple owners, or is it limited to a reduced number.

Analysing this, we often find that the business cannot survive in the long term in sustaining several family members, nor can it be economically separated. Effectively this means that only one child may end up with the family business. For rural families this has been accelerated where the size of families is increasing rather than reducing, which means that family groups need to consolidate rather than share business assets.

• What happens if things change?

There is an underlying concern that the best succession planning strategies are only as good as the current situation. Things change, so the structure needs to be sufficiently flexible to adapt to changing landscape.

In assisting family groups, we push for an understanding that the agreements are only as strong as their application to an overarching consideration; what works today may need to be adapted into the future.

• Are assets being sold or gifted to children?

Gifts are great until they aren’t. Succession planning strategies are impacted where gifts have been made without necessarily considering the long-term impact. Assisting family groups where gifts are made and then there is a family separation with the recipient results in a reduction of the pool and a question as to whether there needs to be an equalisation.

Succession planning strategies are not as linear as a simple structure, especially where there are business assets, complex assets or objectives which at first view may not be as simple to achieve.

a. Intergenerational planning

 The fundamental consideration of succession planning strategies is to achieve intergenerational planning, whether this is to exert a level of control in the future or whether there need to be protections to ensure that the assets of the family group are retained.

Specific succession planning strategies deal with the identification of future concerns and highlight management of these issues, but at the same time have sufficient flexibility to ensure that as things change the structure can adapt.

Articulating potential issues at the family level and ensuring that these issues are considered is a core aspect of succession planning strategies. We work closely with family members to understand the long-term objective, the potential risks and to have an understanding of the family dynamic. 

b. Death or departure

 Succession planning strategies are generally forged in dealing with death, but as people are living longer and succession is occurring whilst family members are still alive, there needs to an appreciation that death is only one aspect. Departure from a family business or asset holding can also influence strategies.

Family groups appreciating and understanding timing of decisions is important, ensuring that primary decision makers are able to be heard, and that their wishes are at the forefront. The succession planning strategies will consider these intentions, in line with the overall planning of the family group. 

c. Sale of the business

 A tough discussion within succession planning strategies is whether a family business should be sold or who is going to manage it into the long term. This discussion is often one avoided but is a core element of succession planning and forging an appropriate strategy.

The challenge arises where it is economic to sell a business, but there is family resistance to doing so. The succession planning strategies may include communicating with family members to explain the necessity to offload family businesses to articulate that the financial considerations may be more necessary than the retention of a business legacy.

The development of succession planning strategies surrounding business assets needs to consider not only the individual asset but its place within the overall assets of the family group. Where there are inter-entity loans, transactions between family members or where there are tax considerations, a sale may be necessary order to achieve the wider aims of the group. 

d. Farming businesses 

A unique structure generally surrounds family businesses, primarily due to the cost structures embedded against the assets that are not necessarily realisable against a farm or where a settlement is achieved it will labour the asset with significant debt and an inability to control debt if things go wrong.

In developing these succession planning strategies it can be difficult to find a balance between the retention of the asset and the settlement with non-farming members, or where the value of the asset cannot be economically distributed between family members (due to the size of the property being unable to sustain separation). At this time, the strategies are a balance of economic and emotional and there is a strong necessity for open communication and an understanding of the unique nature of the strategies that apply to rural properties.

 e. Equality and Fairness

Fairness is a concept that is not necessarily simple to measure. What is fair for one is not always going to be acceptable for another and there is a need in the succession planning strategy development to ensure that the human aspect is considered, and fairness is an underlying consideration.

Family groups are often torn apart due to a perception of unfairness at a time of distribution or settlement and as such there needs to be a clarity of the family discussions to ensure that the members are aware of the decisions, the rationale and what the parties are hoping to achieve.

What can go wrong?

 Succession planning strategies can take most factors into consideration, but there is also an underlying consideration of what the risks are and how these can be mitigated.

Attempting to remove or ignoring potential beneficiaries can be one of the biggest risks to a coherent succession planning strategy and can result in litigation or family dispute. Equally, where decisions are made that are not necessarily fair to specific family members, or where emotions have been ignored in the decision-making process, this can cause harm to the dynamic and put stress upon the structure that has been undertaken.

It is often commented that communication is the key, that family members should be given a forum in order to articulate their concerns before the trigger is pulled. It is not sufficient to make decisions in a vacuum, as it applies to the succession planning process and instead it is key to open the door for robust communication. A failure to do so creates expectations that are not forged with the reality of the situation in mind, which can result in future disputes, bad blood or the severance of family relationships. This can often be avoided by simply discussing what the plan is and how each member will be impacted.

Failing to consider the taxation implications of a succession planning strategy is an area where we see a lot of harm for family groups. Failing to understand taxation implications or making decisions that have not been influenced by an understanding of the taxation outcomes means that distributions may be uneconomic or that parties are disadvantaged because a failure to properly tax plan prior to the strategy being implemented.

The area of succession planning strategies is one that needs careful consideration, communication and planning. A structure that is done well will retain harmony within the family; a process that whilst tough, is necessary.