Our German Desk
As the first 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) outline some high-level considerations when it comes to business succession planning.
More than a decade ago there was a lot of noise in the market about a massive intergenerational transfer of wealth. It was anticipated there would be a tidal wave of accumulated wealth passing through to the next generation, as the last of the baby boomers theoretically approached retirement.
The reality is the tidal wave never came. People held on to their businesses longer, the global financial crisis came and went and, of course, covid arrived and lockdowns caused havoc for many businesses.
There were, of course, many business sales and purchases in the usual course, but not the expected intergenerational transfer of wealth. However, as business owners approach 70 (or for many who are already there), the sale or transfer of their business has now become urgent and necessary.
Hesketh Henry is now seeing a significant uptick in work around development and execution of succession plans for long held family businesses. There is one key lesson applicable to each situation – having a sufficient lead time to assess the position, address issues and plan for eventualities is absolutely critical to a successful business transition.
What is Business Succession Planning?
In simple terms, business succession planning is the task of future proofing your business for the next owner. It is a conscious and deliberate process. This is not necessarily easy, and there will inevitably be some confronting issues to address – but those who put the time into preparing a plan in a disciplined manner will reap the benefits, including:
- Getting to grips with strengths and weaknesses in your existing business model;
- Identifying and dealing with any gaps in management, insurance, funding/ financial or legal structures;
- Being prepared for any unexpected (or expected) events (sickness/death);
- Having your business ‘deal ready’ for when an opportunity presents itself.
Although the key focus of business succession planning is the transition of your business and the preservation of its value through a change of ownership, the task is often closely aligned with your wider estate and trust planning considerations. Ancillary aims above and beyond your business succession planning may also take into account philanthropic and family legacy considerations.
Executing the transition
Identifying a suitable buyer is part of the process. For example, it may involve:
- A sale or transfer within the family to the next generation;
- A management ‘buy out’ or ‘buy in’ – where either the existing management team or an external management team acquire the business;
- A trade sale to a third party (sometimes to another business in the same industry);
- A sale to a competitor.
Who typically helps with Business Succession Planning?
Business succession planning usually involves a number of experts throughout the course of preparation and execution of the plan. At minimum it will involve obtaining advice from both accountants and lawyers to ensure internal processes, legal structures and accounting considerations are put in place prior to any transaction. These experts will also be involved in supporting a sale transaction, possibly with the additional support of a transactional M&A or business broker. A well considered business plan will have been checked and stress tested by all business advisors – this paves the way for a smooth collaboration between advisors when a sale opportunity presents itself.
What’s at stake?
The cost of getting business succession planning wrong can be very serious. Erosion of value in a business is a potential consequence – and at worst, in the context of family businesses, it can result in breakdown of relationships within a family.
Although it sounds obvious, starting early is the key to business succession planning. Unfortunately, most business owners overlook this critical step, meaning shorter lead times which can lead to compromised outcomes.
Over the course of the coming months, we will look in detail at legal structures and 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.
