Despite increased multi-national growth, small to medium sized family owned businesses remain the cornerstone of the local economy.
Approximately 75% of all Irish firms are family owned businesses. Together they contribute greater than 50% of the country’s gross domestic product (GDP) and approximately 50% of employment.
In spite of this sizable market share a very small amount of these family businesses have engaged in appropriate succession planning. Just 20% of non-farming businesses are being passed on to the next generation.
Succession of course does not always mean passing on to a family member, it can also mean the sales of assets or shares of the business.
What is the purpose of Succession Planning?
- Transferring Management Responsibilities
- Ensuring continued leadership of the company
- Identify issues that may hinder the process
- Anticipate ‘side effects’
- Establish a process
What are the challenges to Succession Planning?
- Taxation and Legal Aspects
- Choice of Successor – competent, interested, committed, etc.
- Delayed Retirement/Increased Longevity
- Not wanting to ‘Let Go’
- Process takes more time than expected
- Willingness of departing owner to share power
Where do I start with succession planning?
The primary issue facing owners of a business when planning the passing on of their business is the complexity of balancing the needs of the owners with the needs of the business.
Since this is a subjective and sensitive issue, especially with family businesses, succession planning differs from person to person and business to business.
Factors important to selling your business, whether it be an asset or share sale:
Deciding to sell your business can be difficult. How the sale will be structured is a matter for negotiation between the seller and the buyer.
There are a number of important factors between the sale of assets and shares. A share sale involves the sale of all of the shares in the company that owns and operates the business, while an asset sale involves the sale of the specific assets within the business.
Specific planning is required if you intend to sell off only one section of your business or assets.
If you sell the company by share sale, all of the liabilities of the business remain with the company and your post-sale liability will usually be limited to the warranties and indemnities you give to the buyer.
In the case of an asset sale, the liabilities of the business are not specifically transferred to the buyer, they then remain with the company, meaning that ultimately you will have to deal with them.
Adequate legal and tax advice is vital before deciding whether to go down the share sale or asset sale as this will affect the structure of the sale.
In a share sale, the employees continue to be employed by the company being sold and their status remains unchanged. In an asset sale, the new owner is legally obliged to take on the seller’s employees on identical terms and conditions and the Transfer of Undertaking regulations will apply.
Once a succession or sale plan is agreed, the legal requirements and tax implications will need to be considered, though the essential building blocks of any successful succession plan are effective communication within the stakeholders in relation to their feelings about and future aspirational goals for the business.
NB – This is a guide for information purposes only and does not constitute legal advice. If you have an issue requiring legal advice, please contact any of the team at Nolan Farrell & Goff at 051 859999/ reception@nfg.ie
