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March 12, 2015

Top Seven Steps to Successful Succession Planning

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  1. Start Early. Most families don’t talk about a plan for the continuance of the family business. Even fewer complete a plan that can be successfully carried out. Developing a good plan takes time, often years. The sooner you start with succession planning the better. Begin discussing the issues before a crisis.
  2. Communication. Ground rules need to be established and the best way to do this is to involve a skilled non-family facilitator or mediator who can lead the necessary discussions. Potentially high emotions will need to be kept under control, the conversations kept on topic and various relationships respected. It is almost impossible for anyone personally involved in the succession planning issues to manage all these elements in a safe and neutral manner.
  3. Involve all stakeholders. Successful planning includes all family members in the discussion. Make sure attention is paid to the personal feelings, ambitions and goals of everyone concerned and do not let your expectations override their needs. Treat all family members as individuals and do not assume they want the same things as you do or as each other.
  4. Seek the advice of outside experts. Your lawyer and financial adviser can help you put together a succession plan. However, don’t ignore the emotions and family conflicts that play critical roles in the success of your family business succession plan. Silence, not talking about succession, ignoring the emotions and conflicts in the family, these are the main reasons why family business succession planning often fails.
  5. Document values, wishes and goals. Having these included is a much better way to flesh out the intention behind legal documents which can be dry. And besides people will more easily remember family mantras like “Whatever you do, don’t fight” than a clause in a document about dispute resolution.
  6. Implement the plan. Start implementing the plan as soon as possible so any unforseen consequences can be dealt with in a timely fashion and whilst those in control still have the power to change it. It is always going to be far better dealing with these issues in a productive manner around the boardroom table than in the morgue or the divorce courts.
  7. Review the plan. Things always change. The law and relationships certainly do. Plans put in place several years ago should be reviewed to ensure they can achieve what they aim for in light of the positions of the stakeholders and the law.

March 11, 2015

Notes from Bernie’s radio interview with Tony Delroy’s Nightlife on ABC Radio 702 on Tuesday 10 March.

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Click here to download the Podcast

Introduction

What is it about succession planning that strikes fear into the hearts of the most resilient of human beings? Why is it that too many farmers and family business owners let death, divorce or illness make their succession planning decisions for them?  Tonight we are joined by psychotherapist and mediator, Bernie Bolger and Estate Planning Lawyer and qualified Financial Planner, Donal Griffin, as we explore exactly what is it about succession planning that sees it top the list, year in year out, for the task most avoided by family business owners and farmers alike.

Question

As the cliché goes, there are only two things we can be sure of in this world – death and taxes! Surely succession planning would make the inevitability of these events less painful?

Spoken like a true homo economicus!  That assumes that we are all rational human beings and history has shown us time and time again that we are not!  Only 30% of family businesses make it to a second generation and only 12% to a third. Why is that? Succession planning done well is messy – it involves emotions and conversations and conflict and egos – it is much easier to just have a beer at the end of the day and discuss the footy!

Question

Emotions and Conversations between whom? Are you suggesting succession planning involves more than the will being read out about a week after the demise of the head of the family?

That might have worked in days gone by when the eldest son was the automatic heir. However nowadays with a higher level of education available to all family members, increased job opportunities outside the business and the recognition that the women in the family might actually be better qualified to take over the reins into the future, inheritances have become an awful lot more complicated.  And this is before we have even spoken about the ‘in-law factor’…

Question

But surely a decent lawyer and financial adviser working together can draw up a water tight document which will make sure the wishes of the patriarch are followed and to hell with non-believers?

Therein lies the problem.  Succession planning is not just about taking into account the wishes of the owner– a good succession plan must also take into account the expectations and needs of all the relevant family members and ultimately get the buy-in of all the stakeholders.

Most families think of succession planning as three issues: management, ownership, and financial. Left out of the discussion is the reality that all succession planning is fundamentally emotional. There is absolutely no point in a farm or business being left to one family member if that is going to cause irreparable family rifts, turning brother against brother and mother against daughter.  Even though the will supporting this scenario might be clear, that to me would be abject failure.

Not only is there no success in that particular succession, the law in Australia gives most disappointed family members the right to challenge a Will. This means that the parties can communicate through lawyers which rarely helps and usually makes things worse.

Question

It all just seems too hard.  We all know you can never please everyone so what can we possibly do to get this right?

It all starts with communication.  Which sounds easy but is actually what stops the process getting started in the first place.  People find it extremely hard to talk about money and wealth at the best of times but layer it into a mix of family – both in-laws and out-laws – differing expectations and understandings around contributions to the business, fears of being judged as being too greedy, fears around what will happen if you don’t want to be part of the business, fears that all will not be equal amongst equals and it is easy to understand why families falter at the first hurdle. Even easier to understand why the beer and footie conversation is a very attractive option!  So in order to make sure the important conversations occur in a productive manner – families need to realise that this conversation is probably one of the most important they will ever have and set aside the time and space to have it properly. All the research shows that investing in the skills of a good facilitator is going to increase exponentially a family’s chances of doing this well.  Someone who can speak to all stakeholders in a safe manner and understand the values, needs and goals of each person separately and as a family.

Question

So what can a facilitator do that a selected member of the family can’t?

The big difference is neutrality.  A facilitator comes in without an agenda or a bias towards any particular outcome. Family dynamics and politics are always difficult and what we are trying to do with succession planning it to get honest answers from all stakeholders.  Assumed expectations are a killer.  Perhaps a business has been in a family for generations – think how hard and scary it might be for the fourth generation to actually say ‘I really don’t want to have anything to do with it’.  Think about the guilt, the pressure to carry on the family tradition and in many cases it’s easier to just conform and get on with it – condemning oneself to a life without passion.  And there is the other side of the puzzle.  Perhaps the current owner recognises that his son / daughter does not have the tools to run the business and an outsider would do a better job.  But he doesn’t know how to say this in case it’s taken in the wrong way and so he says nothing.  And even if a formal meeting is convened but is run by a family member – these issues are still unlikely to be addressed.

Question

Where do you see the place of professional advisers in this? 

It is really important to brief the professional advisers as soon as possible in the process, whether that be an initial consultation to just to let them know this is what you want to do and possibly also to introduce them to the facilitator. The more collaborative everyone is, the higher the probability of a positive outcome. Often a person who runs a business or a farm is a strong personality and is used to doing things their way. When choosing a professional adviser, it is important to select someone who will challenge the person so that they make informed decisions, with an eye on how those decisions are likely to be received. I see lots of Wills which are most likely written by the client with the lawyer simply as an enabler or allowing the use of their firm’s name on the back page.

Understanding the drivers and values behind different stakeholders’ needs and goals can help advisers also adopt less of a zero sum or win/lose approach and put more effort into creative problem solving.

Whether you own a business or farm, time is either your ally or your enemy. You can spend time planning for succession during your active business or farming lifetime, or postpone planning and wait until the more chaotic, uncertain and expensive succession planning occurs post-mortem, when the choice is no longer yours.

The lesson? Start early. Select your successor(s), and work with a financial and legal professional to develop a succession plan before it’s an issue.

Question

I’m still not convinced that everyone’s needs can be met.  What happens if after speaking with a facilitator it is obvious that e.g. three out of four siblings want to take over the business?  We all know that sometimes decisions have to be made and having too many chiefs at the helm will interfere with this process.

At the end of the day hard decisions need to be made but it is still better for these to be made while the owner is alive and conversations are still possible.  It is also important to understand that managing and owning a business are not necessarily the same thing and getting paid market rates for jobs done irrespective of ownership is an important key. Lowering expectations early in the day and being clear and transparent about the succession plan enables people to make informed choices e.g. if the major asset is the farm with little liquidity, it is better understanding upfront rather than finding out after 20 years on minimum wage that it does not make financial sense to start subdividing the farm to support the lives of all the siblings and their dependents.  Decisions about staying or going can be made at the start of working lives rather than half way through.

Question

Staying with the farm issue, is it possible to set up structures so that all family members can be looked after even in the absence of liquid assets?

The best structure to look after more than one family member is a trust. It establishes the difference between decision makers (the trustee) and the people to be looked after (the beneficiaries).

In a very simplified way, the trustee’s role is to consider the needs of all of the beneficiaries and distribute the income and capital from the trust when the trust deed and the circumstances (cashflow).

Even creative lawyers cannot magic cash out of a trust if there is none there and the assets are illiquid and cannot easily be converted to cash. However, a trustee could refinance the illiquid assets and get a mortgage or overdraft to either pay money to the beneficiaries from time to time or invest a separate amount of capital into a separate trust or sub fund which is invested in liquid investments which do produce cash.

One issue with farms is that they are dependent on crop yields or markets and they may have several bad years in a row, with not much cash flow. Asset rich but cash flow poor.

It may be that the trustee is directed by the patriarch or matriarch to borrow money themselves in order to have that money given to the other family members. This can be the price for them to be the trustee and not be under pressure to find resources to distribute to other family members.

Alternatively, the patriarch or matriarch may allocate separate assets for the family members who are not living with the trustee. These assets could come from life insurance policies.

Question

And what about the dreaded D word?  How do we protect the family business and assets from those pesky, money-grabbing in-laws?

Every person who sets up a trust has to set out the beneficiaries. In some trusts which are bought off-the shelf the list of beneficiaries is very broad and includes spouses of all of the beneficiaries. The first thing that should be done to protect against spouses is for them not to be beneficiaries. It is best that this is done at the start of the trust as changing beneficiaries later can have negative tax consequences.

However, in Family Law proceedings the Court has jurisdiction to look at trusts and may determine that they are in effect property of the family or a resource of one of the parties to a marriage. This is a very complicated area but, at Legacy Law, we can advise clients how to do this.

One other way is to ensure that any family money given to a household in which there is an in-law in residence is given by way of a loan, rather than a gift. Again, at Legacy Law, we have written an article on this and invite your listeners to get in contact with us if they would like to get a copy of that.

 Question

Given that so much of our identity is wrapped up in our work, how hard is it emotionally for a successful business owner to just hand over control?  How hard is it for them derive meaning and purpose from other aspects of life?

And once again we can explode a myth.  The beauty of a well-executed succession plan is that it is not an all or nothing scenario.  It is exactly what is says it is – a plan with milestones and timeframes. Implementing a plan over time gives the various stakeholders a chance to get used to the idea of change.  It gives the successor a chance to take on more responsibility in a structured fashion and make mistakes along the way. At the other end of the spectrum it gives the owner a chance to develop other interests and ways of creating a legacy.

Question

Is thinking carefully about succession important even if there is no family business or family farm?

The short answer is yes.

Even if there is not a business or a farm, there may be a family trust which holds family wealth. In our experience, very little thought is given as to how to transfer control of these structures to the next generation. Without careful consideration, it may be that one only of the siblings gets total control of the trust and, people are disappointed to discover that neither the law nor a Will can bind them to act in a particular way.

There have been several cases recently reinforcing that the trustees of discretionary trusts and superannuation funds have very broad discretionary powers and even though there are clear conflicts of interest, the person in control can quite legally act in a way which results in them getting all of the trust assets.

We all learn from experience and are lucky to see the different experiences of many families. It is often universal and learnings from different parts of the world are often very relevant here.

We curate ideas and we are bringing together some thought leaders including a man called Alan Crosbie who has written a book called “Don’t Leave it to the Children” at a conference in London in October this year (yes, just before the Rugby World Cup semi-finals) if any of your listeners would like to hear how people in the rest of the world manage these difficult issues.

Alan points out that we are unreliable judges of our children’s skills, particularly not only when running a business, but also when running a trust. Their financial needs, motivations and abilities may be very different from each other. Unaddressed,that usually ends in irreversible family conflict which is not the legacy most people would want.