Creating a legacy for the next generation

Alex Savage, Independent Financial Adviser, Pareto Financial Planning

Succession planning (a strategy for identifying and developing future leaders at a company) is often underrated, yet it is crucially important in ensuring business continuity for family businesses across multiple generations.

Most family businesses will want to pass the business on to the next generation but relatively few actually do. In fact, 70% of family-owned businesses fail or are sold before the second generation gets a chance to take over.

The transition of a business from one generation to the next can be a difficult process.

Some owners do not want to plan or think about their withdrawal from the business. This reluctance typically arises from a strong sense of attachment to the business; an aversion to letting go of control and power; fear of retirement; and also, the inability to make succession choices between their children.

Financial factors often also play a part.

Families in business have an opportunity to create a lasting legacy. A solid succession plan can also drive the growth of the business, minimise taxes, and set the stage for retirement.

Retirement planning

An owner-manager usually has a personal vision to retire “someday,” but perhaps not have adequately considered what it will take to make it a reality. Even leaders who profess they’ll never retire have to acknowledge that no one remains at the helm forever.

An unprepared new management group, or even a poorly managed transition to competent management, can trigger significant loss in value.

Retirement planning can be a challenge. For many, it means drawing an income from a pool of saved or invested wealth, however for business owners it may be more complex. In addition to savings, retiring owners may work to create sustainable cash flows from the business they have left.

In some cases, they may also rely on instalment proceeds from the sale. I often see clients coming to me in their late fifties wanting to start their retirement planning now and wishing they had started it years ago.

You are limited on what you pay into a pension each year tax efficiently so the earlier you start the better.

Life insurance planning

The death of a key individual can put enormous pressure on a family-owned business and the family members who rely on it for income and capital growth.

Even more so when it is unexpected.

Life insurance is a tool to manage the risk of loss. It can provide income replacement for a family or business upon the death of a wage earner or key employee.

For closely held-business owners, proceeds from life insurance policies may be used to purchase the shares of a deceased shareholder of the company, in order to facilitate the transfer of the business from one generation to the next.

Succession planning

There are no rules for when a succession plan should begin, but generally the earlier the better and not when retirement is a realised option or illness prevents active involvement.

A business plan should be defined early and detail the key objectives and key personnel. The transitions that cannot occur smoothly due to family disputes may result in the business being sold or outside management being brought in.

Protections and agreements can be put in place regarding major decision-making, profit distributions and roles and responsibilities.

In summary

Neither succession planning nor retirement planning happens quickly. You’ve probably spent years preparing for both. Many business owners have a penchant for putting the needs of the business ahead of their own, prioritising daily operations and eventual succession over securing their own wealth.

There is no formula to address the emotional side of succession. But there are strategies and leading practices an owner can use to confirm that his or her legacy isn’t left to chance.