PLATO Louth Newry & Mourne Family Succession 7 Dec 06

8/6/2019 PLATO Louth Newry & Mourne Family Succession 7 Dec 06

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Plato Louth/Newry & MournePlato Louth/Newry & MourneFamily Business SuccessionFamily Business SuccessionPlanning SeminarPlanning Seminar

Financial Considerations in Relation to FamilyFinancial Considerations in Relation to Family

Business SuccessionBusiness Succession

Presented by:Presented by:Feargal McCormackFeargal McCormack

Managing PartnerManaging PartnerFPM Accountants LLPFPM Accountants LLP

Newry, Dundalk & DungannonNewry, Dundalk & Dungannonwww.fpmca.comwww.fpmca.com

Dundalk

7 December 2006


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OverviewOverview

TheThe familyfamily businessbusiness isis oftenoften thethe basisbasis ofof aafamilysfamilys wealthwealth.. ItIt generatesgenerates thethe fundsfunds thatthat feedfeedandand clotheclothe twotwo oror threethree generationsgenerations concurrently,concurrently,andand cancan alsoalso bebe somethingsomething thatthat isis aa sourcesource ofof

pridepride andand toto which

which

allall familyfamily membersmembershavehave aadeepdeep emotionalemotional attachmentattachment..

WhenWhen thethe ownerowner thinksthinks aboutabout retiringretiring oror isis unableunabletoto continuecontinue managingmanaging thethe businessbusiness forfor somesomeotherother reason,reason, itit isis onlyonly naturalnatural thatthat anotheranotherfamilyfamily membermember wouldwould bebe theirtheir firstfirst choicechoice ofofsuccessorsuccessor.. AlthoughAlthough itit isis certainlycertainly possiblepossible tototransfertransfer ownershipownership fromfrom oneone familyfamily membermember totoanother,another, itsits notnot asas simplesimple asas itit maymay seemseem atat first,first,andand requiresrequires planningplanning toto ensureensure itit happenshappens

smoothlysmoothly..


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Overview cont.Overview cont.

7070%% ofof IrishIrish familyfamily businesses,businesses, wontwont makemake ititpastpast thethe 55thth yearyear thatthat thethe founderfounder leavesleaves.. ThisThis isissadsad forfor family,family, sadsad forfor thethe peoplepeople employedemployed inin thethebusinessbusiness andand indeedindeed sadsad forfor thethe locallocal economyeconomy..

OnlyOnly 2424%% ofof UKUK FamilyFamily BusinessesBusinesses survivesurvive asassuchsuch throughthrough toto thethe secondsecond generationgeneration andand onlyonly1414%% makemake itit beyondbeyond thethe thirdthird generationgeneration..

TheThe bestbest wayway toto makemake aa businessbusiness profitable,profitable, isis totoensureensure thatthat thethe peoplepeople whowho managemanage andand workwork ininthethe businessbusiness areare thethe bestbest.. ThusThus allall familyfamilymembersmembers maymay notnot necessarilynecessarily workwork inin thethebusinessbusiness.. MakeMake thethe businessbusiness profitableprofitable andand thethefamilyfamily willwill benefitbenefit..


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PlanningPlanning isis keykey toto businessbusiness successionsuccession planningplanning..SuccessionSuccession isis aa processprocess andand notnot anan event,event, thetheprocessprocess shouldshould bebe initiatedinitiated earlyearly andand revisedrevised ififnecessarynecessary.. TheThe importanceimportance ofof earlyearly planningplanningcannotcannot bebe overstated,overstated, sincesince itit generallygenerally increasesincreasesthethe likelihoodlikelihood thatthat familyfamily businessbusiness ownersowners willwillmeetmeet allall ofof theirtheir financial/wealthfinancial/wealth managementmanagement

andand taxtax planningplanning objectivesobjectives..

Overview Cont.Overview Cont.


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Family BusinessesFamily Businesses

ThereThere areare uniqueunique dynamicsdynamics ofof familyfamily businesses,businesses,whichwhich makemake themthem differentdifferent fromfrom nonnon--familyfamilybusinessesbusinesses..

FamilyFamily firmsfirms areare facingfacing increasinglyincreasingly complexcomplexissuesissues thatthat affectaffect notnot onlyonly thethe destinydestiny ofof thethebusinessbusiness itself,itself, butbut alsoalso thosethose ofof thethe proprietor,proprietor,hishis familyfamily andand hishis employeesemployees.. HowHow doesdoes thetheproprietorproprietor reconcilereconcile hishis ownown andand hishis familysfamilysaspirationsaspirations withwith thethe commercialcommercial goalsgoals ofof thethe firmfirm..


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FamilyFamily businessesbusinesses differdiffer inin importantimportant waysways fromfromnonnon--familyfamily businessesbusinesses..

TheThe overridingoverriding characteristiccharacteristic thatthat distinguishesdistinguishesmostmost familyfamily businessesbusinesses isis aa uniqueunique atmosphereatmospherethatthat createscreates aa sense sense ofof belongingbelonging andand ananenhancedenhanced commoncommon purposepurpose amongamong thethe wholewhole

workwork--placeplace..

Family Businesses Cont.Family Businesses Cont.


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Advantages of Family BusinessesAdvantages of Family Businesses

CommitmentCommitment

KnowledgeKnowledge

Flexibility in time, work and moneyFlexibility in time, work and money Long range thinkingLong range thinking

A stable cultureA stable culture

Speedy decision makingSpeedy decision making Reliability and pride.Reliability and pride.


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Disadvantages of Family BusinessDisadvantages of Family Business

FamilyFamily businessesbusinesses areare proneprone toto somesomeseriousserious andand endemicendemic disadvantagesdisadvantages..

ManyMany ofof thet

he problemsproblems

hinge

hinge onon t

het

heinherentinherent conflictsconflicts thatthat cancan arisearise

betweenbetween familyfamily andand businessbusiness valuesvalues..


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Disadvantages of Family BusinessDisadvantages of Family Business

Cont.Cont.DisadvantagesDisadvantages couldcould bebe summarisedsummarised asas followsfollows::

RigidityRigidity

Business ChallengesBusiness Challenges -- Modernising outdated skillsModernising outdated skills-- Managing transitionsManaging transitions

-- Raising capitalRaising capital

SuccessionSuccession

Emotional issuesEmotional issues

Leadership and legitimacyLeadership and legitimacy


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The Three Circle Model of FamilyThe Three Circle Model of Family

BusinessBusiness

2

Ownership

5

3

Business

1

Family

4

7


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Family Business ReportFamily Business Report

Ireland 2006Ireland 2006TheThe followingfollowing observationsobservations inin respectrespect ofofownership/successionownership/succession ofof IrishIrish familyfamily businessesbusinesses isisinterestinginteresting::

5050%% anticipateanticipate changechange inin thethe ownershipownership ofof theirtheirbusinessbusiness;;

2222%% anticipateanticipate changechange inin thethe ownershipownership ofof theirtheirbusinessbusiness withinwithin fivefive yearsyears.. AlmostAlmost halfhalf ofof thesethesebelievebelieve thatthat ownershipownership willwill passpass toto thethe nextnextgenerationgeneration;;


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Family Business ReportFamily Business Report

Ireland 2006 Cont.Ireland 2006 Cont. 5252%% ofof participantsparticipants anticipatinganticipating aa changechange inin

ownershipownership havehave notnot consultedconsulted theirtheir taxtax

consultantconsultant inin relationrelation toto successionsuccession planningplanning;;

4646%% havehave consideredconsidered separatingseparating thethe propertypropertyassetsassets fromfrom theirtheir businessbusiness;;

3030%% havehave consideredconsidered separatingseparating thethe passivepassiveincomeincome generatinggenerating assetsassets toto allocateallocate betweenbetweenactiveactive andand passivepassive familyfamily membersmembers..


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Life Cycle of a Business OwnerLife Cycle of a Business Owner

InIn termsterms ofof successionsuccession planningplanning thethe

lifelife cyclecycle ofof aa businessbusiness ownerowner cancan bebe

brokenbroken downdown intointo threethree veryvery distinctdistinct

phases,phases, andand withinwithin eacheach thethe ownerowner

willwill havehave aa veryvery differentdifferent setset ofofobjectivesobjectives..


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First PhaseFirst Phase

CoversCovers businessbusiness fromfrom startstart upup oror

acquisitionacquisition throughthrough thethe growthgrowth inin thethebusinessbusiness.. ObjectivesObjectives normally,normally, one,one, oror aacombinationcombination ofof fourfour thingsthings::

Profit maximisation;Profit maximisation;

Cash maximisation;Cash maximisation;

Shareholder value creation; andShareholder value creation; and

Lifestyle maintenance.Lifestyle maintenance.


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Second PhaseSecond Phase

SeriousSerious contemplationcontemplation isis givengiven toto exitingexiting

business,business, thist

his usuallyusually startsstarts upup toto t

hreet

hreeyearsyears fromfrom whenwhen ownerowner actuallyactually exitsexits..

DuringDuring thisthis stagestage thethe focusfocus isis onon transitiontransitionmanagementmanagement andand preparingpreparing thethe businessbusinessforfor salesale..

AtAt thisthis stage,stage, setset aa TransitionTransition DateDate targettargettoto focusfocus thethe mindmind..


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Third PhaseThird Phase

TransitionTransition datedate notnot necessarilynecessarily thethe datedate thetheownerowner willwill exit,exit, butbut itit isis thethe datedate thethe finalfinal phasephase

commences,commences, thethe phasephase wewe callcall transactiontransactionmanagementmanagement.. DuringDuring thisthis timetime thethe ownerownerconcentratesconcentrates onon thethe exitexit processprocess..

TheThe exitexit processprocess takestakes managementmanagement attentionattention

awayaway fromfrom runningrunning thethe businessbusiness anan unsettlingunsettlingtimetime forfor employees,employees, customers,customers, supplierssuppliers andand ofof

coursecourse thethe ownerowner themselvesthemselves.. TryTry andand keepkeep thisthistimetime shortshort..


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ConclusionConclusion

RememberRemember thethe changechange inin thethe ownersowners

objectiveobjective doesdoes notnot correlatecorrelate toto thethe lifelifecyclecycle ofof thethe businessbusiness itselfitself.. Businesses,Businesses,generallygenerally havehave aa muchmuch longerlonger lifelife cyclecycle(continual(continual existence),existence), thanthan thethe averageaverage

durationduration ofof ownershipownership.. AA tiredtired businessbusinessownerowner doesdoes notnot necessarilynecessarily correlatecorrelate withwithaa stagnatingstagnating businessbusiness..


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Financial Succession OptionsFinancial Succession Options

SUCCESSION

OPTIONS

1. Appoint afamily

member6. Do nothing

3.Appoint aprofessional

manager4. Liquidatethebusiness

5. Sell, inwhole

or in part

2.Appoint acaretakermanager


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Preparing a Business for SalePreparing a Business for Sale

Dos . . . . and Donts . . . .Dos . . . . and Donts . . . .


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Dos ...Dos ...

StartStart thethe groominggrooming processprocess wellwell inin advanceadvance.. AimAim toto sellsell whilewhile thethe businessbusiness isis stillstill profitableprofitable.. BeBe vigilantvigilant withwith costscosts asas youyou prepareprepare forfor salesale.. EnsureEnsure thethe premisespremises andand thethe equipmentequipment isis

presentedpresented inin thethe bestbest possiblepossible lightlight.. TryTry toto tietie inin keykey employeesemployees toto encourageencourage themthem toto

staystay withwith thethe newnew ownersowners.. WhenWhen talkingtalking withwith potentialpotential buyersbuyers explainexplain thethe

pastpast andand sellsell thethe futurefuture.. ImproveImprove managementmanagement informationinformation systemssystems andand

empowerempower thethe managementmanagement teamteam


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Donts ...Donts ...

TryTry toto packagepackage inin assetsassets unrelatedunrelated totothethe salesale ofof thethe businessbusiness..

AttemptAttempt toto transfertransfer unresolvedunresolved legallegal

issuesissues toto thethe newnew ownersowners.. ManipulateManipulate youryour accountsaccounts toto showshow

thethe businessbusiness inin aa betterbetter lightlight..


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Valuation of BusinessValuation of Business

Maintainable EarningsMaintainable Earnings goodwill,goodwill,

brands etc.brands etc. Net Assets (Revaluation of assetsNet Assets (Revaluation of assets

etc.)etc.)

Berlinger Method.Berlinger Method.


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Transfer of Business to FamilyTransfer of Business to Family

MembersMembers LegalLegal statusstatus ShareholderShareholder // PartnershipPartnership AgreementsAgreements AbilityAbility ofof succeedingsucceeding familyfamily membersmembers toto runrun

businessbusiness (ownership(ownership versusversus management)management) DontDont bebe afraidafraid toto sellsell businessbusiness toto releaserelease mostmost

liquidliquid ofof assets,assets, cashcash NeedNeed toto fundfund retirementretirement ofof retiringretiring parentparent (s)(s)

optionsoptions maymay includeinclude pensions,pensions, dividend,dividend, purchasepurchasebyby companycompany ofof ownown shares,shares, salesale ofof sharesshares //

businessbusiness ConsiderationConsideration ofof allall childrenchildren (those(those involvedinvolved andand

notnot involvedinvolved inin business)business) ValuationValuation ofof allall assetsassets andand possibilitypossibility ofof sharingsharing

outout assets,assets, withoutwithout disruptiondisruption toto businessbusiness


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Transfer of Business to FamilyTransfer of Business to Family

MembersMembers AvoidAvoid emotionalemotional andand familyfamily strains,strains, byby notnot

fudgingfudging thethe decisiondecision ii..ee.. dontdont deferdefer thethe decisiondecisiontoto thethe nextnext generationgeneration (in(in mymy experienceexperience thisthis isis aatimetime bomb)bomb)..

HaveHave thethe couragecourage toto taketake decisiondecision rere familyfamilybusinessbusiness successionsuccession nownow andand thenthen communicatecommunicatedecisiondecision inin anan openopen andand transparenttransparent wayway totofamilyfamily membersmembers..

IfIf youyou passpass onon business,business, youyou shouldshould stepstep backback..YouYou shouldshould appointappoint aa clearclear leader,leader, dontdont leaveleave itittoto aa committeecommittee.. ImIm allall inin favourfavour ofof sharedsharedresponsibility,responsibility, butbut youyou cantcant runrun aa businessbusiness asas aademocracydemocracy..


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Effective Taxation Planning toEffective Taxation Planning toFacilitate Business Succession to Family or otherFacilitate Business Succession to Family or other

PersonsPersons

Share vs Asset SaleShare vs Asset Sale

Treatment of GoodwillTreatment of Goodwill


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Effective Retirement Tax PlanningEffective Retirement Tax Planning

IssuesIssues

CGTCGT

Capital Acquisition TaxCapital Acquisition Tax Stamp DutyStamp Duty

Net Effective rate ofTaxNet Effective rate ofTax


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CONCLUSIONCONCLUSION

The final test of greatness in a CEO is how well he

chooses a successor and whether he can step aside

and let his successor run the company(Drucker, 2004)

Documents

PLATO Louth Newry & Mourne Family Succession 7 Dec 06