Business Succession - Enterprise Ireland · 2011. 12. 1. · Niall Glynn 22 November 2011....

© 2011 Deloitte & Touche

Business Succession

Niall Glynn22 November 2011

Succession planning – What is it?

• Transition of management and ownership of a business

• It’s a comprehensive and strategic approach to the process

• Involves many business disciplines

• Requires a clear and early focus – critical for long term survival of the business.

2 Business Succession © 2011 Deloitte & Touche

Why plan?

• Substantial wealth transfers over the next 10-15 years

• Many closely-held businesses fail to complete the transition to the next generation

• Many owners want to retire and sell their business, but have not adequately considered the steps required to do that

• A long-term program to identify and groom future company executives must be undertaken


Why plan?

• Statistics– 40% of businesses expected to change hands in next 10 years

– Possible exit mechanisms

– Trade sale– Private equity– MBO– Merger– IPO– Family– Employee– Other


Starting OffInitial Questions

• Is your successor identified and in place? Do they need managerial or talent development?

• Do you have a contingency plan if you become disabled?

• What are your personal goals and aspirations for transfer of ownership and management

• Do you have a retirement plan in place?

• Do you have a shareholder agreement in place?

• Are you aware of the value of your business?

• Are you dependent on the business to meet your income needs in retirement?

• Have you considered your overall corporate structure and how ownership will devolve as part of your succession goals?

• Have you assessed your tax position?


Why businesses don’t plan for succession?


Overview

• The art is in the planning

• Business continuity and growth

• Personal wealth management

• Legacy

• Tax

• Family dynamics and governance

• Role of advisers

TaxTaxArt of planningArt of planning LegacyLegacyPersonal wealth management

Personal wealth management

Continuity & growth

Continuity & growth

Family governance dynamics

Family governance dynamics LegalLegal AdvisersAdvisers


Letting Go

• Emotional tie to the business

• Need for security - organisational security- family security- personal financial security- psychological security

• Letting go really means relinquishing control

• If unable to let go – still need a contingency plan


Session One: The art is in the planning

• A multidisciplinary approach is required (broad based)

• The approach involves drawing on the experiences and expertise of several advisors who work together as a team

• Succession planning is complex due to the interweaving of family interests with business concerns

• The goals of the business versus the goals of the family often vary

• Must deal with issues impacting enduring success of the business

• Consider family issues – relating to legacy, birth right, communication, personalities, and interpersonal dynamics

Art of planningArt of planning


TaxTaxLegacyLegacyPersonal wealth management


Continuity & growth

Continuity & growth



Session One: The art is in the planning

• First step - Articulate the owners’ personal goals and visions for the future of the business.

• Second step - What are the goals of other key stakeholders (individuals significantly affected by the succession plan)?





Continuity & growth

Continuity & growth



Stakeholder Perspectives

2

547

16

3


Key components of effective succession planningBusiness succession planning

Goal articulation

Business strategy assessment

Management talent development

Family information & communication

Corporate finance

Estate planning

Life insurance analysis

Shareholder agreement

Disability & contingency planning

Corporate structuring

‘Creative’ retirement planning

Current business valuation

Compensation planning

Share transfer techniques

Investment strategies





Continuity & growth

Continuity & growth



Goal setting phase – fundamental questions to answer

Should the business owner keep the business or sell it?Should the business owner keep the business or sell it?

If kept within a family, who will lead it?If kept within a family, who will lead it?

Will the selection of a new leader create family animosity or bitterness?Will the selection of a new leader create family animosity or bitterness?

Perhaps the business will be sold. If sold now, is the current business operating strategy maximising value for the

shareholders?

Perhaps the business will be sold. If sold now, is the current business operating strategy maximising value for the

shareholders?

Are there steps a business owner can take to enhance the value of the business in the short term while planning a later sale?

Are there steps a business owner can take to enhance the value of the business in the short term while planning a later sale?





Continuity & growth

Continuity & growth



Communication

• Frequency and structure

• When to start and who to include

• Level of information

• Managing perspectives

• Generational differences

• Understanding what’s unsaid

• Consultative approach – takes account of others opinions in reaching overall decision


Case Study – Scenario A

• Facts:– Robert is a closely-held business owner in his early 60s

– He meets with financial business advisors to build an estate plan

– He believes he has implemented a plan that will save large amounts of tax when he dies

– Family’s perception is that the business succession plan is ‘complete’

– Robert relies more on unrelated key employees (who are not in line for ownership of the company)

– Robert develops health complication. This leaves a vacuum that the children exploit to assert their leadership –a role for which they have not yet been adequately groomed

– Company operations suffer due to friction between family members and key employees

– The value received in the sale of the business is a fraction of the amount projected

– The legacy of the family business is no more.





Continuity & growth

Continuity & growth



Case Study No. 1 – Scenario A

• Key points:

– Succession planning considers many disciplines and interlocks those disciplines to create a cohesive framework

– Robert focused on just one component – estate planning – to guide the business succession planning process.


Case Study No. 1 – Scenario B

• Facts:– Robert begins succession planning by instituting a formal strategic process which encourages

input from all the key stakeholders– Facilitated by experienced professional consultants using proven methodologies and

assessment tools– An understanding of goals, expectations and feelings about legacy and birthright of the

individuals affected by the plan is then understood– The adequacy of the existing plans is evaluated against a succession planning comprehensive

platform– Strategic meetings with stakeholders are conducted and a multidisciplinary blueprint for success

is developed

• Outcome:– When Robert unexpectedly takes ill, the management team and children pull together during the

crisis, rather than struggle for power.





Continuity & growth

Continuity & growth



Possible approach - Immediate

1. Design a specific management grooming process

2. Build an incentive based compensation program

3. Build an incentive based share bonus program for the children

4. Develop an active board of directors, including independent representatives

5. Devise a tax strategy plan, which dovetails with the plans above

6. Review Robert’s wealth creation strategy to identify strengths and weaknesses.





Continuity & growth

Continuity & growth



Possible approach – Two to five years

1. Restructure the corporation and related entities to be more tax efficient and meet estate planning objectives

2. Consider scaling back your current active role in management

3. Reassess adequacy of insurance coverage for company (e.g. key person life, buyout insurance)

4. Finesse your wealth creation strategy to provide the cash flow and capital sums for your ‘dream’ retirement.





Continuity & growth

Continuity & growth



Session Two: Business continuity and growth

• Business owners must consider the company’s strategic direction when building the succession plan

• A formal plan for management succession must be developed

• A formal process should be implemented to define the needed management competencies, identify the chosen successors and develop a grooming regime

• Important to monitor the development of the candidate and the validity of the grooming program





Continuity & growth

Continuity & growth




• Business owners need to consider disability insurance to provide income for their families in the event of disabling injury or sickness

• Most ownership succession plans require cash (internal or external?)

• Assessment of Management talent – impact on business value.





Continuity & growth

Continuity & growth




• Use of Buy-Sell Agreements:

– Preservation of control between existing owners

– Avoids disruption

– Establishes market where previously illiquid asset

– Can establish predetermined exit price and terms of exit

– Reduction in financial risk for deceased’s family.


Session Three: Personal wealth management

• Business owners anticipate reliance on cash flow or sales proceeds from their business to fuel retirement

• Retirement planning can be challenging





Continuity & growth

Continuity & growth




• Goal setting is the key starting point– what is the business owner’s vision?

– does the owner want to reduce their time at work, remain active in the business or carve out a new role?

– what are the goals and the sort of retirement lifestyle envisioned?

– how much money and time will it take to plan to achieve these goals?

– does the business owner have sufficient wealth to fund the proposed lifestyle?

– does the wealth of the business owner need to be restructured to fund the new lifestyle?

– what other issues are likely to affect retirement cash flow needs?



The retirement plan:

• Is generally interrelated to management development, tax planning and valuation

• Should be consistent and coordinated with the business owner’s succession plan

• Should take into account the use of pensions as a savings vehicle and to provide tax efficient income streams in retirement

• Must be reviewed periodically





Continuity & growth

Continuity & growth




• Old insurance needs may become obsolete

• Upon retirement a business founder must now focus on investing liquid wealth-challenge

• The descendants of a successful company founder may have a lot of wealth to manage

• Consider the establishment of a family office – which is professionally managed– whose primary role is to manage family affairs and wealth– to protect family wealth and promote harmony.





Continuity & growth

Continuity & growth



Session Four: Legacy

• Delays in addressing management succession can adversely impact on the business

• Responsibility for grooming the next generation belongs to the senior business owners

• Many management-development plans require the family member to start at the bottom of the organisation then eventually move into an executive position

• To preserve family harmony– critical to separate family issues from business issues

• Success in the succession process hinges on open communication to stakeholders

• Next generation managers must be able to make management decisions without interference from the founder.





Continuity & growth

Continuity & growth



Session Four: Legacy – Management development

• It is better to deal with management development issues while the owner still exerts strong leadership over the business and family.

Other questions likely to surface include:• does the chosen successor want the job?

• is the successor competent and willing to do everything it takes to develop the business?

• is the owner willing to relinquish control for the successor to transition into a management role?

• are there other siblings who feel working in the business is a birthright?

• are there gender barriers to entry into the business?

• what about dealing with non family key employees who are currently more experienced than family member successors?





Continuity & growth

Continuity & growth



Session Four: Legacy

• Continuing role of the business founder can be:– Outside consultant to the business;– Role on the company board of directors;– Serve as the head of an advisory board which reports to the company board of directors.

• The share transfer plan must be coordinated with:– The business owners’ retirement plans;– Estate plans– Timing of the company’s management-grooming program– The company’s compensation arrangements– The buy-sell agreement– The proper corporate structure and related elements of corporate finance.





Continuity & growth

Continuity & growth



Session Four: Legacy – shareholder agreements

• A shareholder agreement, or buy-sell agreement, is a contract between shareholders of a privately held business

• Establishes a procedure for redeeming or buying out an ownership interest in a closely held business when a specific event occurs

• Can provide a business owner with protection and help ensure the owner’s interest in the company does not end up in the wrong hands.

• The buy sell agreement can create an exit mechanism or market for shares





Continuity & growth

Continuity & growth



Session Four: Legacy – shareholder agreements

• A number of scenarios below illustrate the types of circumstances in which consideration of a buy-sell agreement would be prudent– what happens to the business if the owner dies?

– what happens if a business owner’s equal partner dies?

– what happens to the business if the owner becomes permanently disabled?

– what if a business owner has only a minority interest in a privately held company? Is there any secondary market for such an interest?


Session Four: Legacy - Buy-Sell Agreements

• Most common types are cross-purchase, redemption and hybrid cross-purchase/redemption agreements

• Cross-purchase agreement – remaining shareholders purchase the shares from the selling shareholder or the selling shareholder’s estate directly.

• Redemption agreement – company, rather than the individual shareholders, buys the shares of the company from the selling shareholder.

• Hybrid cross-purchase/redemption agreement – shareholders may choose to cross-purchase, or execute a corporate redemption, whichever makes the most sense at the time.





Continuity & growth

Continuity & growth



Session Five: Tax issues in business succession

• CGT – retirement relief

• CAT – business property relief

• Stamp duty

• Pre-transaction planning

• Case study 2

• Future of reliefs





Continuity & growth

Continuity & growth



Session Five: Tax issues in business successionCapital Gains Tax

• CGT at 25% on market value of assets/shares

• CGT retirement relief applies to disposals to child or favourite niece/nephew without limitif conditions met:

• Disponer aged over 55 years• Shares/assets held for 10 years ending with the disposal• Working director for 10 years and full time working director for at least 5 years• Trading company/group

• Exclusion of investment or non-trade assets

• Clawback if assets/shares disposed by child within 6 years





Continuity & growth

Continuity & growth



Session Five: Tax issues in business successionCapital Acquisitions Tax

• CAT at 25% on market value of assets/shares

• 2011 CAT threshold for children - €332,084

• CAT business property relief reduces the taxable value on a disposals to child or favourite niece/nephew if conditions met:

• Family controlled company• Shares/assets held for 5 years ending with the disposal• Trading company/group

• Exclusion of investment or non-trade assets

• Clawback if assets/shares disposed by child within 6 years

• Offset of CGT arising on same event





Continuity & growth

Continuity & growth



Session Five: Tax issues in business successionOther

• Stamp duty at 1% on shares 6% on other assets

• 6% stamp duty rate halved on transfers to blood relatives

• Potential changes in budget or future budgets

- increase in rates- reduction in threshold- reduction in reliefs by either percentage of relief or cap- Commission on Taxation report- EU/IMF programme for government





Continuity & growth

Continuity & growth



Session Five: Tax issues in business succession Issues Case Study No. 2

Shareholder Issues

• Family business with shares held by father and mother

• Value of company circa €5m

• Three children working in business but no clear view of who will take over

• Parents wish to transfer value at present while:

(1) a low valuation is sustainable, and

(2) generous transfer of business reliefs available

• Due to family issues, the parents wish to maintain control

Appropriate Structure

• Existing shares split into voting shares and economic shares (with rights to dividends and assets)

• As a rule of thumb, economic shares hold 85% of company value

• Economic shares are transferred to children equally while voting shares are retained by the parents

• Parents retain control of the company and its operations while the children hold the underlying value


Session Five: Tax issues in business succession Issues Case Study No. 2

Taxation Issues

• No CGT paid by parents due to CGT retirement relief

• No CAT paid by children as CAT business property relief brings value of shares below CAT thresholds:

€5m x 85% x 10% x 1/3rd =

Gift of €142k per child (below CAT threshold)

• Only tax leakage is 1% stamp duty on shares :

€5m x 85% x 1%= €42k

Future Issues

• Parents retain circa 15% of the value of the company

• Parents retain voting control

• Control can be passed to one or all children in due course with minimal tax liability

• Potential to use CGT retirement relief to provide up to €1.5m tax free to parents on their relinquishing control in future


Session Six: Family dynamics and governance

• Family politics/dynamics can cripple family businesses

• Need to separate the ‘business of the family’ from the ‘business of the business’

• A board of directors or external board of advisors may help improve the management and profitability of a company during transition

• Best candidate for a board member is an individual who is a knowledgeable, experienced and impartial outsider

• Managing the interactions between family issues and business decisions- biggest challenge





Continuity & growth

Continuity & growth



Family Business Dynamic

• Family v. Business- Control - Conflict (interpersonal)- Careers - Culture- Capital

• Succession life cycle- Stage business is at- Age of founder / existing generation- Ages and numbers in next generations





Continuity & growth

Continuity & growth



Session Six: Family dynamics and governance

Business Ownership Family

Management Team Board of Directors Family Council





Continuity & growth

Continuity & growth



Session Six: Family dynamics and governance– Family Councils:

• Provide for governance between the family

• Families are able to improve communication, accountability and harmony

• Serves as a board of directors for the family.

• Function to protect the growth, development and welfare of the family

• Provides family members with a regular, structured forum to make agreements, communicate and decide on the proper roles for the family members

• Need at least one liaison between the corporate board and family council

• Liaison is responsible for coordinating and managing the family goals and expectations with the company strategic plan.





Continuity & growth

Continuity & growth



Session Seven: Legal – Types of Transfer

Voluntary Transfers – Lifetime Transfers

• Sale• Gift

Involuntary Transfers

• Death• Separation/Divorce• Bankruptcy





Continuity & growth

Continuity & growth



Session Seven: Legal – Lifetime Transfers

Document lifetime transfers – Deeds

• Need to look at your constitutional documents – do current partners/shareholders have pre-emption rights?

• Complete necessary registrations – CRO filings, Land Registry etc.

• Deal with tax

Other

• Enduring power of attorney – planning for the possibility of you becoming “incapacitated” and unable to deal with your affairs.





Continuity & growth

Continuity & growth



Session Seven: Legal – Restrictions on Transfer / Solvency

Solvency

• Declaration of solvency - need to swear you are solvent at date of transfer• Bankruptcy Act 1988• Land and Conveyancing Law Reform Act 2009• NAMA Act 2009

Spousal

• Separation/Divorce – Pre-nuptial agreements- enforceability?• Property held as Joint Tenants• Transfers effected to defeat legal right share claims?





Continuity & growth

Continuity & growth



Session Seven: Legal – Transfers on DeathWills • Why make a will?

• You have control over where your assets go

• Avoid possible disastrous consequences of an intestate administration

• Importance of reviewing wills:− Automatic revocation on marriage− Important event (birth of child)− Sale of Assets− Impact of cash legacies on residue− Foreign Assets





Continuity & growth

Continuity & growth



Session Seven: Legal – Transfers on Death Legal Issues

• Children –Section 117 of the Succession Act, the test is that of the “just and prudent parent”;

• Spouse’s Legal Right Share – spouse legally entitled to 1/3rd of estate if “issue” and 1/2 of estate if no “issue”;

• Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 - Civil Partnerships – rights of civil partners now mirror those of spouses;- Cohabitants – qualify if financially dependent and living together for 2 years if

parent of child and 5 years where no child;- No automatic right to a share of the estate, rather they have a right to seek redress.





Continuity & growth

Continuity & growth



Session Seven: Legal – Trusts Fixed Trusts/Bare Trusts/Discretionary Trusts

• Create a Discretionary trust to protect:− Minor children− Children with incapacity− Vulnerable adult children

• Appoint Executors/Trustees

• Set out their powers – sell business?

• Need to mindful of tax impact of setting up certain trusts, e.g. Discretionary Trust Tax.





Continuity & growth

Continuity & growth



Session Seven: Legal – Shareholder/Family relations

• Establish a family constitution to:− Outline process for decision making and holding of meetings− Set out long term goals for family involvement in the business− Set out benefits each family member can expect from the business− Provide mechanism for dealing with family members involved in the business− Establish criteria for selecting leaders and leadership transition− Provide dispute resolution procedure

• Shareholders agreements− Voting rights− Transferability of shares− Distribution/dividend policy





Continuity & growth

Continuity & growth



Session Seven: Legal – Legal AspectsCase Study No. 3

Shareholder Issues Appropriate Structure

• Gifted majority of shares to child in the business –55%

• Gave 20% to second child

• Founders shares bought out giving him CGT treatment on exit

• Key employee made managing director and now allocated additional shares

• Training program for family member – shadowing managing director

• Shareholders agreement – 3 very different shareholder perspectives

• Clear guidelines re salaries and dividend policy established

• Founder became reliant on key employee

• 2 children, one in the business, one not involved

• Children not ready to take over

• Founder wished to retire/exit

• Wealth mainly in the business so maintain equality some equity needed to go to child not involved

• Some equity (10%) has been given to the key employee

• Need to govern relationships into the future





Continuity & growth

Continuity & growth



Session Eight: The role of the advisor

• Succession planning program may require assistance of many different individuals with different areas of expertise

• An advisor can help:– to collect candid information from stakeholders– build a shared understanding of the differing viewpoints – manage emotional turmoil – arrive at equitable compromises– build a shared vision for the future.

• Very difficult for an ‘insider’ to accomplish all this

• No single individual possesses all the skills needed to develop the best possible succession plan.

• A coordinated team of specialists representing multiple disciplines should be on call.





Continuity & growth

Continuity & growth




Strategic management consultant

Retirement planner / CFP

Succession planning lead consultant

Privately ownedbusiness Corporate finance/IPO

specialistManagement

development consultant

Compensation and benefits specialist Investment adviser

Certified valuation expert appraiser Tax specialist

Corporate and family governance expert

Family business counsellor

Insurance specialist





Continuity & growth

Continuity & growth




• Crucial member of succession planning team is the lead succession planning consultant

• The stakeholders work directly throughout the succession planning process with the lead consultant

• The lead consultant must have a very conceptual ‘big-picture’ understanding of the overall succession planning process

• They must be able to interact effectively with the business owners and stakeholders.





Continuity & growth

Continuity & growth



Conclusion

• The application of a multidisciplinary planning platform is the key to structuring a comprehensive and strategic approach

• Succession planning necessitates that a company examine and integrate many different business planning elements into one coordinated plan

• Elements to consider include:– business strategic direction– development and/or recruitment of management talent– share or business transfer techniques– entity structure– compensation planning– retirement planning– valuation and financing alternatives.

• Owners must consider the effect a business succession plan may have on their personal financial situation.



Continuity & growth

Continuity & growth


Family governance dynamics LegalLegal AdvisersAdvisers ConclusionConclusion


Key Themes

1. Communication

2. Preparation of successors

3. Management

4. Leadership/CEO – control

5. Appropriate structures

6. Start early



Continuity & growth

Continuity & growth


Family governance dynamics LegalLegal AdvisersAdvisers ConclusionConclusion


Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/ie/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

These materials and the information contained herein are provided by Deloitte & Touche and are intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s). Accordingly, the information in these materials is not intended to constitute accounting, tax, legal, investment, consulting or other professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. These materials and the information contained therein are provided as is, and Deloitte & Touche makes no express or implied representations or warranties regarding these materials or the information contained therein. Without limiting the foregoing, Deloitte & Touche does not warrant that the materials or information contained therein will be error-free or will meet any particular criteria of performance or quality. Deloitte & Touche expressly disclaims all implied warranties, including, without limitation, warranties of merchantability, title, fitness for a particular purpose, non-infringement, compatibility, security and accuracy.

Your use of these materials and information contained therein is at your own risk, and you assume full responsibility and risk of loss resulting from the use thereof. Deloitte & Touche will not be liable for any special, indirect, incidental, consequential or punitive damages or any other damages whatsoever, whether in an action of contract, statute, tort (including, without limitation, negligence) or otherwise, relating to the use of these materials or the information contained therein.

If any of the foregoing is not fully enforceable for any reason, the remainder shall nonetheless continue to apply.

© 2011 Deloitte & Touche. All rights reserved

© 2011 Deloitte Touche Tohmatsu

http://www.deloitte.com/ie/about

Business Succession - Enterprise Ireland · 2011. 12. 1. · Niall Glynn 22 November 2011....

Documents

Transcript of Business Succession - Enterprise Ireland · 2011. 12. 1. · Niall Glynn 22 November 2011....