Getting it right/getting it wrongHow succession planning can work effectively, and tips on what to avoid |
Getting it right
The founder of the business realised his two children are not yet ready to run the business. One child was involved, the other was not. When it came to division of his estate, it was still necessary to give some equity in the business to the child who was not working in it.
Ultimately, equity was allocated to a key employee who became managing director and held 25% of the shares in the business with a majority stake in the business left to the child who was involved in it, with the balance of the shares being left to the non employed child.
In addition, some of the founder’s shares were bought out, allowing him to extract value from the business at the capital gains tax rate.
The family member employed in the business shadows the managing director and when they retire, it is anticipated that the family member employed in the business will be ready to take over. In effect, the non family member managing director is acting as a bridge between generations.
A shareholders agreement governs the relationship among the shareholders in the business as differing issues arise for all of them, being the family member employed in the business who is the majority shareholder, a family member not employed in the business who is a minority shareholder and a non family member who is managing director of the business and is also a shareholder.
The shareholders agreement protects the interest of all concerned. There are set salary and bonus guidelines for those employed in the business in addition to a distribution policy on annual dividends. Here, there is a management programme for the family member involved in the business.
Management in the business has not been compromised by them being inserted into the lead role while not yet ready for it and the overall structure will facilitate continuity of the business into the future.
Getting it wrong
An individual had made an extremely complex will, splitting various shareholdings in companies among their siblings and nephews and nieces. He then however intended to change the will in favour of his spouse.
After his death, a dispute arose as to who would get certain assets under the deceased’s estate with siblings and nephews/nieces disputing entitlement of the deceased’s new wife and their children. The litigation dragged on and up to one-quarter of a very large estate was dissipated in legal fees before a settlement was eventually imposed by the court.
It is an important lesson as to how you plan to leave your assets and shows that leaving minority shareholdings in private companies does not work. You should package your assets leaving separate assets to individual family members. It is important to recognise you will not keep everyone happy and to try and avoid splitting assets and creating multiple ownership situations, which can have disastrous consequences.
