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ownership in more manageable ‘chunks’.
The upside of such an arrangement
is clear. It will be easier for your kids
to fund the purchase of your company
in instalments and you are also giving
your kids the opportunity to get to know
the business, the customers and the
suppliers and also reducing the risk that
they will leave to pursue other career
opportunities. It also allows your child
to become steeped in the culture of the
business and how things are done, while
allowing you to slow down over time and
gradually withdraw.
Hope for the best, prepare for
the worst
You may enter a transition plan with
the best of intentions, but let’s be
honest. Expecting the lifetime owner
of a business to gradually fade into
the background over a few years and
then gracefully bow out is not exactly
realistic. Tradies are known for
brutal honesty and for wearing their
hearts on their sleeves. Transitioning
out of a business is going to be
emotional and at times there are
going to be disagreements about how
the business should be conducted.
So, we recommend starting the
process by covering all of the possible
scenarios where disagreement could
occur and agreeing on a process
to resolve these, documented in a
Shareholders’ Agreement.
Common situations you should
anticipate include the following:
∫
What happens to remuneration, as
your role diminishes and your kids’
role increases?
∫
What happens if the transition doesn’t
work and your child pulls out? If
they’ve already purchased a stake in
the business, at what price should it
be bought back?
∫
What happens if your kids propose
something that is absolutely
unacceptable to you – for example,
radically changing the business,
bringing in a new partner of whom you
don’t approve, or even winding up the
business. Should you keep a right of
veto in these situations?
∫
What if someone storms out of the
business – should they be restrained
from starting up a competing
business and then poaching
customers?
These are all common business
scenarios which a qualified lawyer can
assist you to anticipate and defray –
before the blow up occurs.
Conclusion
When you’re preparing to transition
your business, it pays to keep a few
key principles in mind. First, deal with
your children on commercial terms.
Secondly, transition the succession over
at least two to three years. Third, keep
a written agreement on what happens
if you have a disagreement during this
transition period. And finally and most
importantly, make sure this is what you
and your kids genuinely want. “Dad, I
don’t want to take over the business”
is a hard enough conversation to have
at the best of times. Just make sure
it doesn’t happen three years into an
expensive ownership transition.
Martin Checketts
heads up the Private Advisory Team
at national law firm Mills Oakley. He
specialises in advising the owners of
private and family businesses and high
net wealth individuals on issues such as
business succession and asset protection.
If you’ve ever tried to sit down and have a conversation with your child about their plans for the future, you’ll know
just how fraught this subject can be. They may be candid with you. They may not.
LEGAL MATTERS