Succession Planning for

Succession Planning for Family Businesses

Family businesses are unique, at the core lies an important dynamic connecting the family and the business through the family’s ownership, which offers both opportunities and challenges.

ANTHONY PACE

Anthony Pace is an accountant by profession and a tax partner at KPMG in Malta working extensively in the area of family businesses and transaction services.

When one takes a look at the most successful family businesses, one will note certain common characteristics. Dedication to community, an entrepreneurial ethos, and a concentration on deep-rooted and lasting strategic thinking and legacy. All of these qualities are essential for a business to thrive, but the key to sustaining the business in the future and ascertain its growth, lies in smart succession planning. This imperative ‘middle’, bridges the gap between two visions – the entrepreneurial creativity that establishes the business and the long-term ambition to ensure the growth and continuity of the business. Although businesses might be faring well enough in the present-day, what about a decade or two from now? Generally, most family business owners find themselves so involved in the daily running and operations that they do not contemplate on what is required to make sure that the business continues to, not only function in an effective manner, but also grow substantially once they step down as leaders.

A smart succession plan therefore envisions the future of the business, anticipates the struggles that the business may be faced with, and prepares for it. This includes making preparations for disturbances within the business, such as the exigencies of new leadership and the transfer duty implications arising upon succession.

The role of the Advisor

A smart succession plan covers the succession of both the ownership and the management of the business – two equally important yet distinct functions. Yet, the

transition of any business, including these functions, can generate a mix of emotions. Letting go is not an effortless exercise and taking over the reins can also have its challenges. Having the right advice during such a pivotal business and life decision can make all the difference. This is where the advisor’s role becomes crucial since they can help their clients consider all the elements that go into passing the business on to the next generation including in relation to the following:

Communication and implementation

The transition of a family business from one generation to the next is an intricate and, more often than not, a sensitive exercise, especially since succession planning closely relates to the owner of the business eventually retiring. Most business owners are hesitant to address the subject as they feel that they still have a lot to contribute to the business and that they are the ones which truly understand its needs. It is thus important for the advisors to sit down with the family members and listen to their needs, expectations, worries and fears – both collectively and independently. Indeed, involving family members in the succession plan can help ensure that all persons involved are informed and feel comfortable making decisions about their individual and collective futures in the ownership and management of the business.

Communication and implementation of the succession plan can ensure that all the risks are mitigated and each person is duly informed on the process, timelines and goals.

Management process planning

Management process planning guarantees that family members clearly understand the prospects and responsibilities of taking over the business. Ownership and family frameworks with well-established principles, in addition to a family charter may aid in addressing these issues. A family charter is a set of guidelines which helps the smooth transition of the family business to the next generation as it ensures transparency and clarity, and foresees and mitigates any disagreements which might arise through specific procedures which would kick-in in such eventualities. A family charter also administers other areas of management structures within the business, such as profit distribution and the process of selling shares.

Leadership succession strategies

Solid and effective succession planning goes beyond identifying a successor, but also comprises coaching and training the successor during the transition period – making sure that he knows the nitty-gritty details of the business and is well-prepared to take over once the time comes. Although the persons to which the owner intends to pass on the business to (generally the children) may be highly accomplished and competent, there may still be questions about whether they can run the business as well as their successors have done, and this is precisely why the transition period is pivotal to a business’ continuity.

Leadership succession strategies can aid in examining and identifying the right leader and develop a plan of action to coach and train the next generation.

Tax Implications

Another important consideration that needs to be taken into account are tax implications. Family business owners would need to rest assured that upon their retirement or even death, the wealth generated through the operation of the business is not largely paid in taxes. Seeking expert advice in addition to advice on governance issues is key as certain routes are only available if one prepares and plans ahead.

In advising their clients, advisors must take a number of matters into considerations, mainly:

— The wishes and ambitions of the inner team as well as the family members, even those which play a rather non-active role in the running of the business; — The way in which the vision, values and beliefs of the family may affect the succession plan; — Scenarios where the family business already has in place rules regarding the integration of the next generation; — Whether there is an interest in an initial public offering (IPO) and going public; — The worth of the business and how that may influence the decision to either sell or pass the business down from one generation to another.

KPMG: Our view

At KPMG, we believe that the growth and durability of a family business lies in creating a balance between the demands of the business and the expectations of the family, therefore it is important for us to work shoulder-to-shoulder with our clients and hold regular meetings with them so as to understand their concerns as they come about and provide reassurance. Building such long term and close relationships with our clients enable us to grasp the basic practical details of the business, and most importantly, the family dynamics putting us in the best position to be able to assist the family understand their options for the future, provide tailored solutions that are ideal for that specific family business, and encourage them in reaching decisions that bring together their traditions, values and ambitions. In aiding our clients build an effective succession plan, we aim towards ensuring that our clients rest assured that management, governance, ownership succession and the subsequent tax implications have been addressed.

SHARON MAY SCICLUNA

Sharon May Scicluna is an Associate Director at KPMG Malta. Over the past years Sharon has managed a team of tax advisors in providing varied tax advice and assistance to clients on various taxation matters including in relation to succession planning, financing structures and group restructuring.