Could your business survive the following scenario? Your business partner unexpectedly dies. You discover that your associate in his will made his 21-year-old daughter the only heir of his shares in the firm. Isn’t that scary? This is easily avoidable with a succession plan in place.
Are you, as most of the business owners, so focused on running your business that you find difficult to address the risk-management or succession-planning side of the equation? As an entrepreneur, you need to demonstrate bravery so planning for the unexpected, like disability or death, may not come naturally to you. Without planning, your lifestyle may be cut short.
About £1trn of wealth is expected to pass down from one generation to the next over the coming 20 years, yet a lot of wealthy business owners choose to ignore the subject of succession. For many, it remains something of a taboo.
There is a Chinese proverb which says: “Wealth tends to pass through three generations. The first generation creates the wealth; the second live off it; the third squanders it.”
Under the Galvin family, Motorola had soaring achievements. Remember this was the company, that invented the cell phone. Those days are over. What went wrong? In 1928 Paul and Joseph Galvin started Galvin Manufacturing to make converters for battery-powered-radios. They spotted a new market and switched to making car radios and police radios in 1930. Motorola next market was walky-talkies a new kind of communications developed for World War II. In 1944 Bob Galvin, Paul’s son joined the company and took over as CEO in 1956. Under his leadership, the company smoothly transitioned to the second generation. Prepping for a handoff to his son Chris, Bob stepped down as CEO in 1986 keeping his Chairman title. As happens in many family businesses the transition to the third generation ended badly for the dynasty. When Motorola in 1997 hit his pick of 150,000 staff, it was a collection of half a dozen businesses competing for R&D and marketing resources. The newly appointed CEO Chris Galvin wanted to reinvent the company and make those businesses to be at peace with each other. But the founder’s grandson lacked vision or luck or both and left Motorola in 2003. Since then the company continued its spiral down to $ 6 billion and less than 15,000 staff!
How can you create an action plan that spells out the specific steps you, your family, your business and your advisory team must take to prepare for a voluntary or involuntary exit. You should:
As you can see it is a multidisciplinary process requiring a close interdependence to meet the goals of the business ownership, the family and the business performances. If you neglect one of the three, it can lead to a disaster.
You might think of signing a shareholder agreement like a prenuptial contract for your business. They are both partnerships, and while you do not enter them thinking things will end badly, it’s important to protect everyone’s interests. It should be established as soon as possible in the relationship when all stakeholders still like each other, rather than 20 years into it when resentment inevitably exist.
Small-business owners often have most of their wealth tied up in their businesses, so it is critical that your shareholder agreement and personal estate plan are interlinked. The goal is to provide for the smooth transfer of the business interests and eliminate any friction between your family and your shareholders.
A shareholder agreement is a business continuation plan that outlines how shares in the business will transfer to a triggering event, such as death, disability or retirement. Usually, shareholders agreements utilise life and dissability insurances as a funding mechanism. For example, if one partner dies, the life insurance proceeds will allow the remaining owner to purchase the shares of the business from the deceased associate’s estate. Additionally, the cash value in the life insurance policy could be used to help fund the buyout of a retiring business owner.
You should review this agreement periodically to ensure the purchasing price mechanism and the funding elements are still relevant and adequate.
Does your business slow when you are away? Do your customers come to you when something goes wrong? Has your business’ revenue reached a plateau? If you answered yes to one or more of these questions you are in what we call the business owners’ trap
Transferring wealth to future generations – whether through your family or charities or both – can be enjoyable but if you don’t plan it correctly, you could put in jeopardy all your life’s work and, potentially ruin your family relationships.
It is highly emotionally charged as it requires to understand for each member of your household their assumptions, perceptions and feelings if not done with the necessary sensitivity it can cause problems. Research shows one-in-three families run into conflict over wealth transmission.
It is even more complicated if you have had more than one spouse, it may lead to think about more stepchildren and step-grandchildren.
Drawing on our extensive experience in this area, we have identified the following eight steps to successful succession. Let’s summarise it using the acronym LEVERAGE:
You should determine and mitigate future risks. You may have generations of experience, but if you don’t, you should rely on advisers. There is no right way. The most efficient process is to manage your wealth identifying future risks.
You should have a clear vision of what your wealth is and share it with your family. In eyesight the more time you spend thinking about this, the easier it will be for all stakeholders to articulate and plan what is best for all concerned.
I am sure you would want to be fair to everyone involved, but equality is not always easy to achieve and maybe not the most equitable method to distribute wealth.
Being prepared for receiving money and fulfil the responsibilities of managing matters in the future require serious preparation, so it is important to train the next generations adequately.
To be able to consider the impact of your views, philosophical outlooks and attitudes to wealth you should understand how you feel about those issues and plan accordingly.
You should analyse what your goals were when you accumulated wealth so that you can distribute it equitably. It could be to offer security, comfort, and education in a nurturing environment to your family or any other purpose.
You must empower your loved ones gradually to practice, securely, managing the family’s wealth. Make them face and understand their future responsibilities while you are still around to ensure they are ready the time comes.
You should understand and articulate your family goals to protect all members of any potential struggle and strengthen the next generation for the future.
Can your business survive without you?
If you wish to build up the value of your business and would want to explore what you could do to make it sellable, please do not hesitate to call Jean-Bertrand de Lartigue on +44 1656 766 363 or email him, firstname.lastname@example.org