Family businesses are a significant proportion of the Scottish economy so we’re delighted to continue our support of research by Family Business United (FBU) Scotland, which highlights their valuable contribution.
Our own initial involvement with family businesses typically happens at a time of change and is often when one generation (mum and dad) are looking to pass things over to the next generation (children).
Sometimes there is a detailed plan in place where various conversations have happened across the family kitchen table and everyone knows what will happen and how. However, more often than not, nothing is done until the point of transition, by which time a variety of problems may have been brewing. Some of these may be:
- Can mum and dad afford to financially step away from the business?
- If they need to be bought out, can the business sustain the level of debt that might be required to pay them out and/or the drain on cash reserves?
- What are mum and dad going to do in their retirement? (I expand this further below.)
- Do the children have the necessary skills and experience to take on the running of the business and drive it forward?
- How will the transition of power and leadership be done from one generation to the next?
- Has the incoming generation thought about their own exit at a later date, and do they have a plan on how this might look? (Also expanded below.)
There are many other considerations, but these are the main ones which we tend to get involved with, along with the businesses’ other trusted advisers.
A busy retirement makes a smoother transition
When I’ve seen a successful transition from one generation to the next it’s been when mum and dad have a busy retirement planned. This means that their ongoing involvement with the business will be limited or at least controlled by the next generation.
For many retirees, a busy retirement might simply be ticking off the things they didn’t have time to do while they were running the business. It often means more travel, but it may also mean taking a greater involvement in some of the philanthropy work they did as part of the business. These are only two examples, but it’s really important that some thought and planning is given to this.
Helping clients visualise what they will do, and ensuring that they have the financial means to do it, is a critical part of our advisory role. We spend a lot of time with clients helping them in this area. We don’t want our clients to have regrets when they look back in later years.
With carefully considered plans in place, they can properly step away from the business and let their children get on with running it, while still being there as a sounding board if needed.
Future exit of the incoming generation – never too soon to plan
You might think that it’s a bit early to start thinking about this, but the sooner the next exit is considered, the more planning that can be put in place and the easier the transition will eventually be.
The initial planning may just be around some high-level financial goals on what their retirement might look like. This will allow some initial planning around cash extraction from the business. The finer details will undoubtably evolve over time, but sketching out an initial plan at this stage should give everyone the freedom and time to make the right choices in the future and ease the transition to the next generation.
An additional benefit of thinking about this earlier rather than later is to try to help identify the next business leaders and put an appropriate development plan in place to ensure they have the necessary skill set and experience when it’s time for them to step up and lead the business.
Running a family business brings many different challenges. Having a trusted network of advisers to lean on can prove a valuable source of knowledge and help you to keep the business growing.
Click image to read or download The 2018 Scottish Family Business Top 100.