Family-owned businesses across the world desire a successful continuity of their business from one generation to the another. Available statistics however suggests that 70% of family-owned businesses globally do not survive into the second generation and only 10% of family businesses survive till the third generation. The process of transiting ownership and management of a family business from one generation to the next could be onerous. Nevertheless, it could be planned for in advance and executed in an orderly fashion through the process of succession planning. From experience, a well-structured plan will help families navigate the challenges and ensures a smooth transition.

In this article, we examined the concept of succession planning and why it is important. We also offered suggestions on some practical considerations that should be taken into account when designing an efficient succession plan.

What is Succession Planning?

Succession is the process of transitioning the management, leadership and ownership of business or asset from one generation to another. It could also be viewed as the formulation of strategies to ensure that your wealth/assets go to the right people at the right time. A proper succession plan should address issues such as correct identification of the assets, the beneficiaries, exclusions, mechanism to ensure transference, decision making etc. While this may appear straightforward, delivering and executing a succession plan is a multi-layered, complex process and one of the biggest challenges family businesses face.

Why do family businesses need a succession plan?

The benefits of having a proper succession plan cannot be overemphasized. A family owned business that survives for many generations is more likely to cater to the financial needs and welfare of family members in the future. In Nigeria for instance, there are many family owned businesses that flourished in the 80s and 90s that have since gone into oblivion after the passing of the founders. These businesses would have contributed in safeguarding the family's financial future. Some of the many other benefits of succession planning includes the fact that it allows the family to cater for the different family dynamics, provides protection for the family's asset by ring fencing them against any possible business or family liabilities etc.

Starting your succession planning process

Due to the importance of this process and the need to ensure that families get it right, we have highlighted below some of the very important considerations that families should consider when designing a succession plan.

  • Start planning early – It always helps to start the conversation early as this makes the transition planning process less uncomfortable and helps to minimise tension. Most times, family businesses leave the topic of succession till very late when the founder or current leaders are exiting or becoming incapacitated due to old age. For instance, we have seen how certain events such as Covid-19 could heighten the need to start these conversations early so that you are able to control events rather than be controlled by them. This is also because planning for transition is rarely easy. There are differing views as to the appropriate time to start planning for succession. Some experts are of the view that five years in advance is good while others think that 10 years in advance is better. The key is to recognise that succession is always a marathon, not a sprint. The longer you get to spend on succession planning, the smoother the transition process is likely to be.
  • Determine the choice of structure – The choice of the structure adopted for succession planning is very important and families will have a set of options, each of which has its own advantages, opportunities and threats which must be examined extensively. For example, a family will need to decide if it should adopt Wills, Trusts, Investment Holding Companies etc. or a combination of two or more for its succession planning. The choice will ultimately depend on a number of factors such as the nature of the business or asset, the objectives of the family, the regulatory and tax laws etc.
  • Always consider the tax implications – In every succession plan, the tax implications must be examined. With the dynamic nature of international tax environment, families must go beyond the traditional tax concerns such as inheritance taxes, business taxes, capital gains taxes, individual taxes etc. to also consider the tax implications of the structures themselves and the future implication for the beneficiaries/ next generation. This is even more important for families with assets and businesses in multiple countries because the tax rules in these countries are changing and this will need to be considered in a robust succession plan.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.