Successful Succession Planning
When successful business owners reach a certain age, it becomes imperative that they address the issue of succession planning. When owners do finally approach their lawyers or accountants for advice it becomes apparent that the business owner has given little thought to his business and does not actually know what they want.
The first step would be a frank discussion of what the client really wants. This discussion requires breaking down some myths that are almost universal amongst small business owners and confronting not only the realities of succession planning, but also the emotions and family dynamics that are powerful forces in many small businesses.
Why not just sell up?
Finding a willing buyer for any business is rarely just a matter of hanging up a “for sale” sign. Buyers are not necessarily prepared to wait until the time is right in a business’s life cycle before making an offer.
The same issues of timing influence the way businesses will be valued. Most business owners have an idea of the worth of their business based on revenues, fixed assets, profitability and a variety of balance sheet items. What the business owners want is fair value paid by the buyer, as if that was a constant or objective number. The truth is that valuing a business is difficult and can’t be done just once, whether it’s the intent to sell the business or pass it on to family members who truly want to be in the business. A good advisor will recommend an independent valuation of the business, documentation of the business valuation data and methodology and periodic review of the valuation.
Begin doing what you want to do now
In business succession planning, time is either your ally or your enemy. You can spend time planning for succession during your active business 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.
Business owners should elect their successor(s), and work with professionals to develop a succession plan before it’s an issue.
It’s surprising how many business owners come to an advisor wanting a succession plan without a successor clearly established. Part of the process is preparing that successor, which may require a long apprenticeship in learning all the operational tasks required in the business, but it may require much more from both the successor and the business owner.
The business owner may also have handpicked a successor that has very different ideas as to how the business should eventually be run. Now the owner has to listen to new ideas about a successful business he or she has built. It’s not easy.
Sometimes business owners will divide the business up between their heirs; or, more commonly in the UAE, they will allow Sharia to divide the business up. Whatever the plan, there may be difficult and uncomfortable issues related to potential divorces and other matters that must be accounted for, if not predicted, in a succession plan.
Some of the most troubling cases, we have found, is where there is a local partner in an LLC. Local partners are only human and nobody lives forever; so if he/she dies, business owners have to realise the local partner’s family will most likely inherit the local partners’ shares in the LLC. So a once easy going, long, historical relationship will suddenly end and the business owner will end up owning a minority share in a UAE company with a group of people he/she does not really know- would they be happy not to play the role of a silent partner? Would they want a bigger fee in return for their assistance? It is hard to predict.
The earlier a business owner begins transferring ownership to a successor, the likelier it is for a succession plan to be a success, both emotionally and financially.
Our team at TWS can advise you on the most effective and efficient ways of planning for the financial security of your business and your family. Please call today for an initial consultation.
The author is Hasnain Khalid, British qualified solicitor and Head of Corporate/Commercial at TWS Legal Consultants.