Saturday 17 August 2019

Sibling-founded family firms need succession plans

Falling success rate for next-generation companies mean it's vital cousins aren't forced to work together

The comedic travails of the Bluth family in TV show Arrested Development can be avoided with proper succession planning in a family business
The comedic travails of the Bluth family in TV show Arrested Development can be avoided with proper succession planning in a family business

Alan O'Neill

Alan O'Neill, author of Premium is the New Black is Managing Director of Kara Change Management, specialists in strategy, culture and people development. Go to kara.ie

Last week, I described the challenges that family members face in having a cordial work relationship so that inevitable tension doesn't go from the office to the home. I also outlined some tips to help prevent that, which fundamentally boil down to open communications and planning.

In a previous feature, I talked about succession in family businesses and the need for planning in advance.

We already know the statistics that show the declining success rate of family businesses as they pass through the generations. It seems that as the family tree spreads out and as siblings, in-laws and cousins get involved, differing perspectives can either enhance or interrupt the rhythm of the business.

While there are many positive stories of family businesses that manage succession really well, think about the more negative case-studies that have hit the news in recent years.

Many of them are about businesses that are being passed from parent-founders to their own children.

The challenges for succession in sibling-founded businesses

There is another cohort of family businesses founded by siblings that I'd like to focus on today.

Last week I met Tomas O'Connor, one of the founders of O'Connor Pyne Accountants, based in Ballycollig in Cork.

With a team of 47 staff, Tomas describes the company as general practitioners for SMEs. However, I was intrigued by its experience and expertise with family businesses in particular. Tomas quoted lots of successes with clients, many of them great family names in the hospitality sector.

For those businesses founded by individuals or couples, passing on the business to their own children brings a particular set of challenges.

But what if the business is founded by a number of siblings? The issue of succession to more than one set of children is another ball game altogether. That introduces cousins to the mix very quickly in the second generation.

The success rate for second-generation family businesses is low and the success rate for families making it to the third generation is in the lower double-digit numbers. That suggests that the risks escalate when cousins work together.

On the positive side, the country has many hidden examples of success with preventative measures and it's worth exploring what some of them have done well.

Tips on planning for sibling succession

Before succession becomes an issue and for various reasons, one or more siblings may feel that the best option is to depart the business, rather than leave their shares to their children and all the challenges that go with that.

It could be that the levels of passion and commitment vary across the cousins. Some may have a burning desire to get involved while others may want to pursue a different career altogether.

Whatever the reasons, rather than force cousins to work together, these tips will give you food for thought as you plan to exit the business.

O'Connor outlined that "according to the Tax Consolidation Act (Section 598) 1997, a departing sibling and partner can legitimately extract up to €1.5m tax-free from their trading business, with certain conditions". They include:

  • You must be aged between 55 and 65 to qualify for the full amount (after age 65, the sum reduces);
  • You must have worked in the business for at least 10 years;
  • You should own at least 10pc of the shareholding;
  • The tax-free amount you receive must match the valuation of your shares at the time of exit of the business;
  • You can also receive a tax-free termination amount;
  • The spouse of the departing sibling also qualifies for a similar amount provided s/he also has at least 10pc shareholding and has worked in the business for the preceding five years.

To maximize this opportunity

1 Because every individual has unique circumstances, seek professional advice to help you plan ahead;

2 Construct a shareholder agreement now that takes due consideration of all the opportunities and risks;

3 Due to the 10-year rule, start planning now (especially if you are currently aged between 45-55);

4 Consider how the business will fund this payment, as the money cannot be borrowed to pay for it.

The Last Word

This is not intended to be an exhaustive list of conditions or steps to take. I'm merely illustrating some alternative possibilities.

The more important message is that some sibling founded businesses have taken a preventative approach while recognising the negative risks in succession to future generations.

Departing the business through careful planning with the guidance of a specialist is one possible way to avoid that.

While the approach that I have taken here is pointed towards sibling-founded businesses, the challenges and the suggested tips will also work for businesses founded by friends or colleagues.

The key message is to have open communications and to plan ahead, regardless of your current formation.

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