Businesses are built through many years of hard work, dedication, and passion. When the time comes to pass a company to the next generation, the financial, tax, and emotional toll it can take should not be underestimated. Julius Baer’s Head of Wealth Planning, Roger Stutz, shares his insights on how to successfully transfer power to the next generation.
Upcoming generations, such as millennials, often have different expectations when it comes to running a business, and they may not always share the same vision as their predecessor, typically a parent. Clear communication is therefore essential. There is often a lot of pressure on both sides to set the right expectations and successfully transition into a new phase of life. In addition, there are numerous wealth and tax planning implications to be considered in advance, which is why timely planning is key to ensuring a smooth handover.
In my experience, there are six questions which every potential successor and predecessor should ponder to make sure the ‘business baton’ is passed on swiftly and effectively:
1. What are our expectations?
If you are a potential successor, you might wonder if this is the right path for you or whether you are ready for the challenge. Perhaps your vision for the business differs from that of your predecessor. If you are the existing owner of a business, you may wish to continue to play a role in the business, or you have concerns about changes your successor would like to implement. Millennial successors, for example, tend to place greater emphasis on technology and on professionalising business operations.
This change of management style could be a cause of concern for others in the business. To make sure both sides understand the issues at hand, it is critical to communicate openly and honestly, and continue to do so throughout – and also after – the handover. This will help the business to succeed in the long term.
2. Would a trial run make sense?
Transferring a business from one generation to the next is a big change for all parties involved. Before jumping in at the deep end, a number of short stints spent working in the business can help the successor to work out whether this is indeed the right step or not. It will give them the opportunity to see what is at stake and where the business is headed. It can also help the existing owner to decide whether the time is right to hand over the business. Alternatively, potential successors could benefit from experience outside of their family business, building up their own objective professional views and learning how other companies are run.
3. What business structure will work for us?
Once both sides have set clear expectations, it is time to think about the structure of the business and establish clear roles and responsibilities. This decision is typically driven by the vision of both parties, their expectations, and capacity. For example, to what extent does the existing owner wish to be involved going forward? Additionally, before passing the business over, the current owner might want to clean up operations or dispose of non-core assets and business activities, and it is important to clearly define any such details.
4. What is the tax situation of the business?
When a business is transferred from one generation to the next, long-term tax planning is an important component. Local tax consultants with extensive knowledge and experience should be engaged for a holistic analysis of those involved (e.g. existing business owner, successor, shareholders). Although essential, tax considerations should not overshadow the professional – as well as personal – goals of those involved and their vision for the business.
5. How will the predecessor be supported in the future?
After dedicating considerable time and effort to building up a successful business, the existing owner will want to ensure a well-earned retirement that meets their expectations. Both parties should take the time to think about agreements they may wish to put in place to ensure a continued income for the person handing over the business. Increased personal withdrawals from the business or dividends may be options, depending on where you are based. It is important to work with specialists who can devise the best possible solution for your needs, risk appetite, and future plans.
6. Who else could be affected by this handover?
Are there other heirs or heiresses to be considered? Perhaps only one child wishes to keep the family business going, but other children or a spouse may be entitled to receive some benefit from the business. For example, a family member may wish to cash in their part of the business. Ensuring that this is planned in advance is essential to maintain the viability of the business. Different options can allow for this, depending on your location and local legal obligations. Be sure to work with a trusted advisor who can guide you through the process, such as the family or company lawyer.
Setting up a shareholder agreement can be another way to manage the interests of involved parties, for example, minority shareholders. Such an agreement sets clear rules of play, helps to avoid conflicts of interest, and protects the interests of all parties involved.
Knowing how and when to pass the baton is never easy. By carefully considering these six questions and taking the advice of succession experts, both current and future business leaders can approach the handover with greater confidence.