Succession Management
Clodagh McDonagh outlines a Chambers Ireland Succession Planning Training Programme from Ernst & Young and Right Transition.
We have all heard the old adage One day my child all this will all be yours- but at what cost? The huge cost involved with handing over a business without careful planning is a frightening reality facing many SMEs currently operating in Ireland today.
Chambers Ireland, in association with Ernst & Young, is currently holding a Succession Planning Training Programme for owner managers and potential successors aimed at combating the high failure rate of Irish businesses as they pass to the next generation. After successfully delivering this tailored consultancy in areas such as Galway, Limerick and Carlow a series of workshops are planned for the Dublin city area.
Recent research by the Irish Management Institute has shown that family-owned firms account for 90& of the indigenous business sector and 50& of employment in Ireland. A staggering 72& of family businesses in Ireland fail to survive the next generation following the death or retirement of the founder. For every two businesses that do continue into the second generation, five do not. Of those that succeed, only one survives into the third generation.
Sometimes the business will have been sold or wound up as part of the owner’s planned and commercially sensible exit from the business. More often, it will have collapsed or declined because of a failure to manage the technically intricate and emotion-laden issue of succession from one generation to the next.
Succession Planning
Succession Management has been cited as one of the top three strategic issues facing businesses over the next few years. Most business owners will face the challenge of transferring their business whether it is to pass it to family members, sell it to a third party or to fund retirement.
To ensure the continued success of the business and a transfer that safeguards the future of the business and all involved is a complex process and the importance of planning should not be underestimated.
The complex skill set needed to cope with the minefield of information in this area has been vastly underestimated to date, and the loss of capital both to those handing over the reins as well as to the successor have been costly for few but devastating for many.
There are three core phases to be covered in a creating a smooth succession that will enable a company to grow in the future:
1. Groom a successor
2. Fund your pension
3. Seek the most tax efficient way of passing on your business
Groom a Successor
For a business to survive past the first generation, it is important that young entrepreneurs identify and groom potential successors from as early as possible. The vital decision is to select a new leader who
will have the vision, appetite and discipline to run the company successfully. This may or may not be one of your children.
In the context of passing on to your children, sharing it equally is unlikely to be best for the business and in the medium and long term will be a threat to the business’s viability. This is probably one of the hardest decisions for an entrepreneur but the business may not be capable of supporting all of the children, nor may the children be properly skilled to manage the business.
Funding Your Pension
It is a common feature of small family owned enterprises that resources are constantly ploughed back into the business neglecting the need for an adequate pension fund. This often results in the entrepreneur being forced to continue working long after it is good for either them or their business as they cannot afford to retire. Thus it is important to make pension plans as early as possible and ensure
that they are adequately funded.
It is critical to create wealth outside the business as early as possible. Profits or drawings from a business should be used to create wealth elsewhere, either in the form of pension funds, property investments or other types of wealth which will ultimately provide the opportunity for one generation to step away with their own financial support and allowing the next generation to run the business on a profitable basis.
Taxation
Succession planning often arises in conjunction with the drawing up of a will. While making allowances for the transfer of a business under a will may be legally sound, it may not be done in the most tax
efficient manner.
Taxes to be addressed in succession planning are:
• Capital Gains Tax – payable on the profit derived from asset values, including shares in your business.
• Capital Acquisitions Tax – tax on gifts and inheritances which may arise if the business is gifted to the owner’s children.
• Possible Stamp duties – government levies on the transfer of specific assets — most notably property.
A number of reliefs have been designed to facilitate transfers within a family.
Agricultural Relief/Business Relief
In essence the relief operates by reducing the taxable value of qualifying business assets taken on a gift or inheritance by 90%. In many cases this will bring the taxable value below the capital acquisitions tax free threshold available for one’s children. The assets must be have been held by the disponer or spouse for 5 years prior to the transfer or for 2 years in the case of an inheritance.
Retirement Relief
Business assets which have been held for more than 10 years by a person over the age of 55 can be sold to anyone without attracting Capital Gains Tax where the consideration is less than €500,000.
Potential Stamp Duty
Transfers of property will attract stamp duty. However, the effective rate is halved where both parties to the transaction are related.
Favoured Niece or Nephew
A niece or a nephew, who has worked substantially in your business for a period of five years ending on the date of a transfer, may qualify as a favoured niece/nephew and therefore will be treated for many taxes as if s/he is a child of the disposer.
The Succession Planning Training Programme
The Chambers Ireland Succession Planning Programme is a full and interactive training course with expertise provided by Ernst & Young and Consultants Right Transition. It is aimed at current and future managers dealing with inevitable issues of transfer, sale and restructuring of both SMEs and Family Business. The course covers areas such as:
• planning an exit strategy
• identifying, recruiting and training a successor
• the taxation, finance and legal aspects of succession
The initiative involves a training programme on succession planning to help business managers understand their own succession issues as well as a management training programme for potential successors to teach them the proper skills to equip them to run a business and allow them to work hand in hand with existing managers to develop sustainable management processes.
Participants will also have access to a number of support tools including case studies, learning resources, a website as well as ongoing advice and support.
Testimonial from a Programme Participant
“Having established an engineering company in 1979, it has always been my wish that this business be passed on to family members when I retire. The course leader from Right Transition was superb, and the contribution from Ernst & Young on corporate finance issues and tax advice was second to none. Before the course I had very little knowledge of succession planning, but now I feel much more confident
of a successful hand over to family members with tax advantages for all” John Grant M.D. JG Engineering Supplies LTD.
Chambers Ireland Succession Planning Programme is funded by the European Social Fund and approved by the Department of Enterprise, Trade and Employment under the National Development Plan. It is supported by Enterprise Ireland.
For further information please contact: Clodagh McDonagh,
Chambers Ireland on 01 4004310 or email:
clodagh.mcdonagh@chambers.ie
