SUCCESSION PLANNING FOR OWNERS, BUSINESS ......SUCCESSION PLANNING FOR OWNERS, BUSINESS AND FAMILY Heather Greatrex & Jason Corderoy EY Objectives Identify the challenges and successes

SUCCESSION PLANNING

FOR OWNERS, BUSINESS

AND FAMILY

Heather Greatrex & Jason Corderoy

EY

Objectives

Identify the challenges and successes to family businesses in

agriculture including the transition to the next generation

Discuss the role of assisting families as they address business

ownership, management succession and the related family

interaction and communication

Identify the key elements of a structure for family business

governance and the tools available to implement that structure

Discuss the impact of entrepreneurship, innovation and

sustainability on successful family business succession

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Agenda

Challenges for family agribusiness succession

Trends in family agribusiness

Passing ownership and or control to the next generation

Understanding key elements for successful transition to the next

generation

Governance overview

Family

Business

Ownership

Implement best practice for the growth of the family business

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Succession in agribusiness

A family of 5 can grow into a family of 50 in 20 years and the rate of

growth of the family members can exceed the growth of business

Succession planning is the most effective tool family businesses have

at their disposal to ensure the firm’s longevity and long-term success

Successful and sustainable family businesses essential – critical to

regional and national economy

Agribusinesses show resilience, tie to the land, hard work,

perseverance and commitment

Innovative approach and appropriate governance creates business

resilience and longevity

Balance family (emotional) and business (rational)

Concerned with identifying willing and capable successor,

maintaining viable business, retirement

Advisors have a critical role – bring the objective view along with

knowledge and experience (and not just tax and structuring advice)4

Family obligations

Managing family assets

Upholding family values

Structured family involvement

Desire for family participation

based on mutual agreement

Emotion

Managing individuals passion

Decision making and problem solving

Managing expectations

Harnessing emotion and passion

for exceptional benefit

Challenges and trends in family

agribusinesses

Business obligations

Operating result

Solid management mechanisms

Maintaining control by the family

Owner obligations

Entrepreneurship beyond the family

business

Managing the financial resources

Desire for intergenerational value

generation

Family

Business

Ownership &

Wealth

Desire for outstanding business

performance

Emotion

Tagiuri & Davis 3 circle model (1982)

Unique challenges of families, their businesses and management of wealth

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agribusinesses

Key

challenges

for

family

agriculture

business

Economic slowdown

Increased competition:

Regional and Global

Political and Regulatory

Risks

Inconsistent cash flow

Exte

rnal pre

ssure

s

Inte

rnal pre

ssure

s

Transfer of company

ownership & control to the next

generation

Each generation brings

increased numbers so difficult

without processes

Increased complexity and

sophistication as business

grows

External and Internal challenges for family firms

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agribusinesses

Accountants ‘key’ role in planning

Business owner’s “most trusted advisor”(1):

Spouse

Accountant

Business peer

Parent

Lawyer

Financial services advisor

85 to 90% of farmers use their accountant as an advisor to their

business (40% lawyer, <25% for others)(1) Based on MassMutual, American Family Business Survey 7 (2007)

(11((1(1) Based on MassMutual, American Family Business Survey 7 (2007)

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agribusinesses

Trends in family agriculture businesses:

2015 agriculture gross value $53.6 billion

Farms are fewer but larger

Improved productivity resulting in greater output per acre

Changes to Technology; Farming applications; Changing consumer

demands; Globalisation and Competition

Increased focus on sustainability of business and land

Increase in ‘off farm’ employment – 45%

Gender equality not changing significantly

>50% expect to pass the farm on to a family member (National Farm

Survey 2006)

13% decrease in farming families between 2001 & 2006 (Agriculture

in focus, 2006)

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agribusinesses

Trends in family agriculture businesses cont:

Baby Boomer (1946-1966) now ready to retire

In 2016 - this group now aged 50-70

Significant number of farmers in this age group

Changing from Baby Boomers to Gen Y and Gen X and Millennials

Different culture between Baby Boomer and next gen

Perceived declining work ethics, drive or motivation?

More career and lifestyle options for next generation

Next gen more educated than predecessors

Next gen more professional process driven management style

Strong desire by next gen to discuss succession

Open communication style not common in older farmers

Increased focus on sustainable farming practices – preserve land,

viable business, competitive edge, long term view

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agribusinesses

25%

were caused by

inadequately

prepared heirs

? ??

3%

or less were caused by

poor tax strategies and advice

60%

are attributable to

how successor family

members interact

12%

were due to lack of a family

mission or purpose clearly

defining use of family’s wealth

Factors that lead to Family Business succession failure

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agribusinesses

Biggest challenges to succession in family agribusinesses today

Recognition of need for planning - but lacking in knowledge

and support

Business 24/7 so little time to focus on planning

Last significant published study for agribusiness succession

was 2006

Lack of discussion on succession by older generation

No common vision or direction

Negative selection on business decisions

Incumbent generation not retiring – why?

Irreconcilable family disputes if we get it wrong

50% change in property ownership in the next decade

(Mendham and Curtis 2010)

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Passing Ownership and or control

Entity options

Sole Trader/Partnership

40% of all farming families had both partners working as farmers

Company

Lowest use of companies per economic industry (ATO)

Trusts

Superannuation Fund

Succession implications

Asset Protection

Estates

Perpetual Succession

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Access to Concessions

Main Residence

Small Business CGT concessions

Farm Management Deposits

Income Averaging

Stamp Duty

Pension

R&D Concession


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Holistic approach

First Scenario

Market Value of group assets as it stands

Details of ownership, directors etc

Second Scenario

Allocating assets as per parent’s wishes

Family Trust – joint control

Operating company to Child #1 who is running the farm

Child #1 already been given money for a house

Advisor’s role to make this happen


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Dad Mum Child #1 Child #2 Child #3 Company Trust

2 Shares Dad Appointor: Dad

Directors: Dad & Mum Trustee Company. Shares 1 Dad, 1 Mum

Assets Directors: Dad & Mum

Cash

Land

Shares

House

Rental Prop

Equipment

Liabilities

Loan

Total


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2 Shares Dad Appointor: Dad

Directors: Dad & Mum Trustee Company. Shares 1 Dad, 1 Mum

Assets Directors: Dad & Mum

Cash $10 $10 $10

Land $100

Shares $10

House $10 $10 $10

Rental Prop $20

Equipment $10

Liabilities

Loan -$30

Total $90 $20 $10 $0 $0 $10 $40


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2 Shares Child #1 Appointor: Child #1, Child #2, Child #3

Directors: Child #1 Trustee Company. Shares 1 Child #1, 1 Child #2, 1 Child #3

Assets Directors: Child #1, Child #2, Child #3

Cash

Land

Shares

House

Rental Prop

Equipment

Liabilities

Loan

Total



2 Shares Child #1 Appointor: Child #1, Child #2, Child #3

Directors: Child #1 Trustee Company. Shares 1 Child #1, 1 Child #2, 1 Child #3

Assets Directors: Child #1, Child #2, Child #3

Cash $10 $10 $10

Land $33.33 $33.33 $33.33

Shares $10

House $10 $10 $10

Rental Prop $20

Equipment $10

Liabilities

Loan -$10 -$10 -$10

Total $0 $0 $33 $43 $43 $10 $40


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Success factors of ownership and

management succession

Balancing act between family strategic issues and those connected with

the business

Each family business is unique – yet successful family businesses have

much in common

Global family business study found success factors were:

View succession as a long-term process

Clearly define responsibility for succession

Prepare next gen for leadership

Also important to tailor individual solution for each family

Best results are dependent on trust, communication and good relations

Getting it right can result in long term generational family business

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Succession Leaders must:

Determine succession timing and successor selection

Create emergency succession plan for interim

Prepare ownership group for succession

Ready the business and leadership for succession such as:

reinvesting appropriately

seeking new opportunities

developing management team

Discuss the exit strategy and timing for the current leader

Build support for the successor within the family, the business and

among all other stakeholders

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Succession process includes questions such as:

Succession in Leadership: Who should lead, willingness and capacity

of next gen, are current leaders willing to relinquish control?

Succession in Ownership: Who will own the property, what

distributions and or dividends?

Building and Creating Legacy and Values: Sustainable business

growth? What are the family values and how will they be passed on?

Passing Wealth to the Next Generation: How will the family wealth be

shared, what are the needs of the retiring generation in the future?

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Preparing the next generation:

Education about the family and business, including the land and the

people

Be part of business decisions including attending meetings with

customers and suppliers

Learn about and understand the industry and particular sector

Gain general business and finance education

Education on effective management and leadership

Attend family meetings and intergenerational family meetings

Attend all or parts of formal/board meetings when they’re ready

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Managing a Successful Family

Business Succession

Successful families recognised the importance of continued innovation.

Innovative and entrepreneurial culture - Ability to change, grow and adapt:

Promoting innovation through informed risk taking

Encourage agile decision making and rapid market response

Creating a supportive environment for taking action and learning from

action without a culture of blame

Encourage study of business and the market, including competitors,

similar businesses in other industries, innovations, customer segments,

current products and services, and new technologies

Communicate stories and display symbols of successful endeavours

Encourage education both internally and externally

Invest in family members’ entrepreneurial endeavours when aligned with

the family’s mission

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Building resilience and aligning

family and business strategy

For family businesses to succeed for

generations, they need a cohesive

code and shared vision. This enables

families to manage themselves

systematically and successfully — for

both the long-term unity of your family

and the ongoing success of the

business.

Family governance: turning relatives into a team

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Information asymmetries

Exclusion and secrecy

“Through the grapevine” information

Assumptions

Power struggles

Divide and conquer

Bribery

Selective attention

Procrastination

Selective amnesiaSource: David Bentall, UBC, 2010

What would it be like without governance:

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Studies indicate family cohesiveness, combined with growth ambition,

sustainability and branding can reflect up to 35% return on equity

Cohesive families can take long term view rather than looking for short

term immediate gains

Discipline of regular meetings - opportunity to move out of day to day

24/7 business cycle to address critical strategy and planning issues

Greater conflict each successive generation – more people, different

families, more opinions, spouses and in-laws

Healthy conflict and methods for resolving issues can strengthen

families and provide resilience

Decisions delayed and productivity drops during family conflict (by 20%

according to Lyn Sykes)

One study of 68 families showed 51 found succession process

traumatic and 14 families did not reconcile (Halam-McKenzie 1997)

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Advantages of good governance

Increases awareness of connection between the family and business

Provides opportunities for effective communication within the family

Documents and addresses expectations of individual family members

Ensures that every family member understands their role and

responsibilities toward the business

Establishes commitment to family legacy and vision

It sets a reference point for future generations

Provides structure for family education and funding of next gen

endeavours

Reduces conflict within family and between family and business

Increases productivity via alignment of family goals with business goals

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Family governance – a constitution

Can take many forms

When is it necessary?

Values, principles, code of conduct, obligations, decision making

process, roles and responsibilities

Defining family involvement at different levels:

Ownership

Management of business

Entrepreneurial activity

Management of family wealth

Social activities

The constitution is emotionally binding but not legally binding.

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1. Family

governance

2. Business

governance

3. Ownership

governance

Guiding principle Family constitution Strategic plan Shareholder

agreement

Forum for

discussion

Family meetings Board meetings Shareholder

meeting

Governing group Family council Board of directors Shareholder group

Leader and role Speaker: represents

values of the family

Chair: conscience

for family and

owners

Steward of the

values of the

company

Domain Involvement of family

in firm (management,

ownership), personal

finance and estate

plan, social activities

Strategic plans: how

to run the business,

expand, invest,

divest

Ownership transition

plan, dividend policy

Source: FOX – “Governance in Family Firms” – Adapted from Business Families Foundation, 2004

Governance structures in complex family firm settings

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Family council

Informal / formal

board

Agribusiness

Informs/consults

Informs/consults

Appoint Provides guidance to family and integration with the

business

Values, responsibilities, objectives, decision making

process, wealth matters, control functions

Appoints family and non family members to board

United front to outside, direction to business

Provides strategic direction for management

Appoints management

Controls business activities, defines dividend policy,

distributions

Appoint

Bringing family, business and ownership governance together

Family owners

shareholders/trust controllers

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Family Board or Council

The aim of a family council is to create familial

solidarity that presents a unified front to the outside

world while, at the same time, simplifying managerial

work and planning

Clear values, responsibilities, objectives, decision-

making processes, wealth matters, control functions

and much more besides can be discussed and

agreed upon openly by the various members

Involving all owners as well as the younger

generation increases their willingness to make a

constructive contribution and to act in the best

interests of the family and the business

Family unity depends

on members being

able to deal with

differences of opinion

internally. A family

council offers an

ideal setting for

doing so.

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Business governance–board of directors

Family members, well-trusted non-family managers and advisors

Advantages of maintaining independent directors on the board of

directors include:

Exercising discipline with regard to business rather than family matters

Adding new skills and knowledge that might not otherwise be available

Bringing an independent and objective perspective on strategy and

control

Making hiring, promotion and termination decisions independent of

family ties

Playing a “buffer” role among different family members in the event of

contradictory views on strategic issues

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Growth model that supports personal

and company performance agenda

Achieving sustainable growth - growth is essential for the long-term

future of the business

The following three factors have been shown to be crucial for

achieving sustainable growth:

Providing unlimited support by all stakeholders

Making cultural and behavioral issues a top priority

Improving the owners’ skills, thereby enabling improvements to

the governance process

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Growth Factors

Sustaining growth and profitability

Managing and retaining talent and next gen planning

Managing capital

Culture and responsibility

Balancing risk

Future management structure

Effective tax management

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Sustainability for family business

Long tenants of the land – looking for long term

return and productivity

Sustainability results in increased operational

efficiencies, reduced waste and increased product

differentiation

Not just end product but entire production process

being examined

Sustainability ensures there is a viable business

and productive land for the next generation

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Conclusion

No avoiding succession – it will happen

Planned succession will always be preferable to

unplanned succession

Do it early, invest the time, get the communication going

Advisors play a crucial role with their knowledge,

experience and objective view

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© Thomas Tulley, Heather Greatrex, Jason Corderoy 2016

Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax

Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and

opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries

in making any decisions concerning their own interests.

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