Family Ties: Intra-Family Succession and Exit Planning

As the second instalment in a series of articles looking at the generational wealth transition and its impacts on business succession in New Zealand, Ben Hickson (partner, Corporate & Commercial) and John Kirkwood (partner, Commercial & Private Wealth) take a closer look at strategies involving family succession.

In our last article, we identified some of the general issues relating to business succession.  We highlighted the need to:

• start the process early (preferably years rather than months or weeks!);
• get to grips with strengths and weaknesses and any gaps in your legal structures or management processes;
• be deal ready when an opportunity presents itself.

We also outlined a number of common exit and transition strategies, including a transfer within the family, trade sale to a third party, sale to a competitor and a management “buyout” or “buy-in”.  In this article we take a closer look at exit strategies involving family succession, and the challenges, sensitivities and opportunities that can arise in a transition within the family. 

Hesketh Henry has been involved in many and varied business transactions between parents and the next generation.  While there are well established models and processes, at the end of the day each transaction will turn on its own facts and circumstances, with the relationships, personalities and family dynamics often being just as important as the business issues themselves.  A number of recent transactions we have been involved in have reinforced the importance of keeping all options open from an early stage, as well as thoroughly considering all possible outcomes when it comes to exiting your business.  Here are a couple of ‘real life’ anecdotes:

One transaction involved a staged buy-in by a third party and the other a trade sale to a third party.  Both transactions foundered and came to a grinding halt for similar reasons – primarily relating to finance.  Ultimately, both transactions were concluded between the different generations of the families, although initially the business owners had set the sale process on a significantly different course than the deals which were eventually concluded.

1. 1. The first example involved a successful import business.  The owner had been introduced by its accountant to a third party advisor who specialised in identifying potential SME business purchasers from the corporate world. who were looking for an opportunity to buy into an SME business.  In this case the options were discussed at length with various suitors and one was identified.  Due diligence was completed and an appropriate structure was put in place.  The purchaser came on board as an employee and entered into an arrangement under which they would buy into the business over time.  However, ultimately the buyer could not raise the necessary funds to complete the initial buy-in.  So, after eighteen months and a lot of effort and cost, the buy-in transaction failed.  Only at that stage did the business owner have the business succession discussion with their family. It transpired that one family member was very interested in taking over the business and had the ability to do so. Those arrangements are now in place and while it is very early days, the initial signs are very promising.
   2. In a second example, a long standing family business was courted by a trade competitor.  Until that moment, there was no intention to sell – however when opportunity came knocking, the vendors took to the idea of an early retirement.  An M&A advisor was appointed (working alongside Hesketh Henry and accounting specialists) to assist with a competitive bid process to maximise returns for the vendors.  Vendor due diligence was completed for the sell-side and its advisors to identify and address gaps in contractual arrangements, in advance of a deal being executed.  After a professionally run bid process, it transpired that the prospective purchasers could not raise the necessary finance for the acquisition.  However, the process did prompt discussions within the family which ultimately resulted in a new leader being identified and a successful intra-family succession plan being executed.  As it transpired, and although not originally conceived at the outset, this transaction represented the best outcome for all stakeholders in the business  – including long standing suppliers and customers who took comfort from the retention within the family, and the continued involvement of the vendor.

If passing on your business to the next generation is an option you have considered, have those discussions early and tease out the level of interest.  Bear in mind too that family dynamics play a part and people will likely take time to absorb the opportunity presented to them.  Leave plenty of time and think through the various issues that are likely to arise.  A few common examples of sensitive issues to consider include:

1. 1. Who in the next generation might be best suited and have the aptitude?
   2. What will other family members think if you appear to favour one over the others?  How will you deal with that issue?
   3. What can you do to be fair for those in the family who are either not interested in joining the business or may not have the skills or desire to run the business?
   4. Family run businesses often have a very different management dynamic.  How do you separate business life from family life and still sit round the dinner table?
   5.  How do you structure the entry into the business and how is it funded?  Is it a staged process or is it funded in some other way?
   6. How long are you prepared to stay in the business?

Although each family will have its own dynamics, the issues noted above will be relevant to a wide range of family succession plans.  We have significant experience in dealing with family companies from the initial phase right through to mature operations.  Regardless of the size of the business, we find that these are the type of issues that constantly crop up. 

So, what are the lessons?

1. 1. Think through all of the potential exit options first.
   2. Don’t discount an intra-family transfer if there are family members who may be interested in taking over the business.
   3. Have the discussions early and thoroughly explore all possible outcomes.
   4. Vendors who have considered all options will have the best chance of executing a successful business exit plan.

Over the next few months, we will continue to look at legal structures and other considerations which feature regularly as part of business succession planning.

Hesketh Henry regularly assists family business owners with legal aspects of business succession planning and execution.  If you would like to discuss, please get in touch with Ben Hickson or John Kirkwood at Hesketh Henry.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.