In working with family agribusinesses that are in the process of transitioning from one generation to the next, I’m always pleased to come across current owners who have established financial security for themselves outside the business.

Letting go is a difficult task at the best of times; the process is made far more stressful if the retiring leader is financially dependent on the business.

Unfortunately, when planning ownership transition and succession, many family businesses focus only on minimising transfer duties. What is frequently forgotten or poorly planned is the financial security of the senior generation after the transition.

The transition process should begin with the owner establishing a clear vision of his or her future after the business is transitioned and discussing this with the next generation.

Everyone should then decide whether the next generation is willing to take on the responsibility of ownership and/or management of the company, and if they are capable of doing so.

The transition process frequently involves programmes to educate and prepare the next generation for their future responsibilities; this will also have to be factored in.

If the next generation is not willing or able to assume future ownership of the business, the senior owner must decide whether to sell to a third party or remain active in the company.

Planning

Transition planning involves both the business and the family, and financial and personal decisions therefore have to be made. Personal decisions, including establishing financial security for the senior generation, are often the most difficult to make.

Once financial objectives are identified, tax and legal counsel can be consulted to establish the most effective strategies and action plans to accomplish these objectives. The financial implications of a transition affects both the older and younger generations.

All too often, the generation at the receiving end of wealth transfer fail to protect their wealth through appropriate financial and estate planning. All owners should be involved in the planning process.

When drawing up a succession plan, ask the following key questions:

• What is the senior generation’s personal vision for their lifetime?
• What income will the senior generation need to sustain a comfortable lifestyle?
• What level of investment will it take to provide the necessary income (after tax) to accommodate that lifestyle?
• To what extent does the senior generation have such assets currently invested outside the business?
• If sufficient assets are not available outside the business, to what extent must the senior generation rely on future income from the business?
• To what extent can the senior generation access ongoing retirement income from the company?
• Will such income provisions limit future financial opportunities for the company?
• Is the next generation willing and able to assume ownership and/ or management of the business?
• If not capable now, what resources and timing will be required for the next generation to become capable?
• If the next generation is not willing, will the proceeds from a sale to a third-party purchaser be adequate to fund the lifetime needs of the family?
• If the company is being transferred to the next generation, are appropriate policies and agreements in place to support the transition?
• Is an appropriate capital structure in place to accommodate an efficient transfer?
• If voting (preference) and non-voting shares are in place, what are the transitioning objectives for each class of shares?
• What should the distribution of ownership among siblings be for voting (preference) and non-voting shares?
• How will ownership and management be held accountable to shareholders in the future?
  Will independent directors or advisers be engaged in the governance process?

Selling to the next generation

If the senior generation doesn’t have sufficient financial assets to meet their retirement needs, a sale or partial sale to the next generation may be in order. In many cases, however, there is insufficient liquidity for the next generation to purchase shares. The company then becomes the ultimate source of funds to complete a successful transition.

When relying on the business to fund a transition strategy, owners should take care to ensure the continuing financial health of the company.

The company could provide income to the senior generation via a retirement or deferred compensation plan established prior to retirement. It might also be able to provide ongoing medical benefits. Many strategies are available to accommodate transition needs and objectives.

Financial independence for the senior generation, the capabilities of the succeeding generation, and the financial strength of the business should all be considered in identifying appropriate strategies.

Prior to transferring shares, it is important to establish governance policies and execute shareholder agreements governing future ownership.

Any restrictions on ownership as well as a workable buy-sell agreement among shareholders should be agreed upon as a prerequisite to transitioning ownership. The majorities required for important decisions, such as the decision to sell or liquidate the business, should also be determined.

Funding retirement

Regardless of what is decided in terms of the business, assumptions have to be made about the senior generation’s financial needs for the remainder of their lives. This is not an easy task; their future lifestyle has to be projected and financial requirements established accordingly.

The task is complicated by the fact that few older people keep accurate records on the costs of their current lifestyle. As a result, living expenses are often underestimated.

The objective is to determine the financial assets that will be required to accommodate a conservative estimate of the older generation’s ongoing financial needs. Conservative assumptions should be made both in the area of expenses and in estimating earnings from invested assets.

In any transition planning process, your chances of having a successful multigenerational family business will be greater if you proactively plan both the family and the business sides of the equation.

Trevor Dickinson is CEO of Family Legacies, a family business consulting company. Visit family-legacies.com.