Advice

TAKE NOTE: Planning for the succession of your small business or franchise

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The Covid-19 pandemic has made it more important for franchisees and business owners to have adequate succession plans in place. This is to ensure continuity if the business owner decides to pursue other interests, passes away or becomes permanently disabled amongst other factors.

It is natural for franchisees or business owners to develop a deep emotional connection with their business. Often it almost becomes difficult to think of the business as a separate entity. Because you’ve invested so much of your time, energy, thought, and emotion into your business, it becomes an extension of yourself.

The problem with that is that the relationship between owner and business will inevitably end someday. This could be a planned occurrence; for example, upon your retirement. Or it could be unplanned; as a result of illness or death. But in both cases the future of the business will depend on the planning you’ve done, and the structures you’ve put in place.

Succession planning is often an aspect of business ownership that we don’t want to spend too much time thinking about. According to research conducted in 2017 by PWC, only 17% of South African family-owned business have robust, documented and communicated succession plans in place.

Partially as a result, in South Africa we see very few businesses successfully transitioning between several generations. 86% of businesses in South Africa are family-owned, but about 80% of them don’t transition successfully to the third generation. This is most often because structures are not set up correctly. Having structures, constitutions and policies in place provides clarity and guidance in what might be a difficult and stressful time.

The first principle of effective succession planning is that it depends on a degree of separation between owner and business. This is one reason why a sole-proprietor structure is so often undesirable – there is no effective gap between owner and the business entity.

A trust is a vehicle we commonly see used by business owners, but their value is often misunderstood. Some owners might have heard that a trust is a desirable vehicle without understanding why that’s the case, and, crucially, without understanding the significant changes in trust legislation that have taken place over the last couple of years.

As a result, when we audit the trust deeds of our clients, we’ve seen that up to 80% are no longer compliant with legislation. In particular, there’s often insufficient legal separation between the trust and yourself. And if it’s not set up correctly, it’s impossible to derive the value we desire from the trust. A properly drawn up trust necessarily involves a degree of separation from the owner.

There needs to be a degree of independence on the board of trustees, through third-party representation. That inevitably comes with a certain loss of control. That trade-off – between separation and control – is one of the issues that must be well understood when planning for the succession of your business.

People also tend to think there are tax benefits to a trust, but that’s not necessarily the case. The purpose of a trust is essentially for succession planning, giving you a platform to ensure you can pass on your business from one generation to the next. Because a trust can’t die; it exists in perpetuity or until dissolved.

Trusts may very well form a part of an eventual succession-planning structure, but they have their own unique requirements, and they’re not the be-all-and-end-all solution to succession planning or other business considerations.

In fact, there is no one-size-fits-all solution. It all depends on the nature and size of your business, what you want for it, and your own, unique circumstances.

The first step to putting in place an effective succession plan is finding the right person to give you trustworthy advice. Make sure that the financial advisor you choose is properly accredited and has experience in business assurance and succession planning. Once you’ve found someone you trust, make sure they understand your unique circumstances. You’ll want to discuss the nature and size of your business, state of indebtedness, family situation and, crucially, your goals and desires for the transfer of your estate. Then you can work with them to quantify those goals, and finally to put proper plans and arrangements in place.

Two specific considerations when it comes to succession planning are debt and franchise rules. Businesses typically run on debt, and if there is not a specific arrangement put in place for that debt burden, at death that debt becomes the liability of the family. Franchisees, meanwhile, must make sure they’re familiar with the rules of the franchisor as they relate to transfer of the property, preferably before they sign the franchise agreement.

So ultimately, to recap: At some stage in life your relationship with your business will come to an end. It’s either going to be a planned exit, where you either sell the business or hand it over to your family, or it’s going to be an unplanned exit, in the case of your death. In either case, there are lots of very helpful arrangements that can be put in place to protect both your family and estate, and to avoid stress and discomfort. But it’s important to put these arrangements in place before they’re needed, and to be honest with yourself about your goals and needs so that they can be effectively achieved.

By Jurgens Boshoff, Head of Distribution: FNB Financial Advisory

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