Have you got a succession plan in place?

During a recent Retailer Advisory Panel meeting, the subject of ‘succession planning’ came up in discussions.

Mandeep Singh.jpgPremier retailer Mandeep Singh, commented "I tried to get my boys to help out in the store during the holidays, as I always used to, but they are just not interested in anything to do with the shop - they armore interested in playing football or Xbox with their mates.”

This prompted a fascinating panel discussion about the importance of succession planning.  What became clear is that even on the panel there were varying levels of succession planning preparedness and given the importance of the subject panel members felt a summary explaining why and how to approach it would be useful for retailers.

Succession Planning - the basics

In its simplest form, a succession plan is a documented plan to be followed in the event of the owner, partner or shareholder’s death, disability or retirement.  It should provide a smooth transition in management and ownership, with the minimum tax exposure.

Often a sensitive subject when dealing with family owned businesses, it really need not be the case, as succession planning should form part of any long term strategic plan for every business.  It should act as a road map both for the development of the business, and for those set to take over, to ensure their readiness.

Successfully Planning Succession

Business succession plans should address the major issues confronting a family business owner seeking to transfer power to successors such as:

  • selecting a successor
  • managing inter-generational conflict, different agendas and different goals
  • providing adequate training for the successor
  • how changes in ownership and management are to be implemented
  • timing of the transition

One of the most important aspects of succession planning is working out the tax exposure following the death of the business owner/shareholder, to minimise the businesses tax liability.

It is crucial to answer important questions up front such as, ‘Where will the money come from to pay taxes?’ Or, if the business is a partnership, ‘Where will the money come from to buy out the deceased partner’s share?’ Potential routes could include the following:

1 - An Outright Sale

Succession planning might involve selling an owner, shareholder or partner’s interest in the business outright.

2 - Buy-Sell Agreements

A buy-sell agreement is a binding contract between business partners that can save both time, money and angst upon the death, divorce, bankruptcy or retirement of a business partner.  A buy-sell agreement is made up of several clauses that sets out factors such as

  • Who can buy a departing partners’ share of the business (this may include outsiders or be limited to other partners)
  • What events will trigger a buyout
  • What price will be paid for a partners’ interest in the partnership.

3 - Selling to Current Employees

Employee Share Ownership scheme allow the owner or owners of a businesses to sell their interest in the business to the employees.                              

4 - Succession Insurance

Life insurance is a popular way to provide the cash necessary for the business or for the surviving owners to purchase a deceased owner’s interest.  Once a set value has been determined, life insurance can be purchased on all of those involved in the business, and in the event that a partner dies before ending his or her relationship with the other partners, the death benefit proceeds will be used to buy out the deceased partner’s share of the business.

It is important to note that succession planning isn’t something that can be done once and then forgotten. An owner, or shareholder should continually revisit the store’s succession plan, reviewing and updating it to reflect changes in the business’s value and market conditions.  It should also continue to document the owner/shareholder’s health as well as the abilities and passion of the people it will be passed on to.  As these things change, so will your business plan.

Ramesh Shingadia.jpg

Londis retailer and Partners for Growth Panel member Ramesh Shingadia commented that the above information should be viewed as good general succession planning guidance, and emphasized the importance for retailers to seek professional advice on both the legalities and arrangements of succession planning, and the associated taxation implications of any potential plan.