There may be plausible reasons why a business or accountancy practice hasn’t prepared for the unforeseen, but there can be little justification for it not being equipped for the inevitable. With its devastating combination of health and economic crises, the pandemic has underlined the critical nature of succession planning.
While this isn’t a specifically Irish issue, a recent PwC survey shows Ireland significantly trailing the global average. Only 23% of Irish family businesses have robust succession plans in place, compared with a figure of 30% globally. The reasons for this more often than not boil down to human nature and simple procrastination.
‘The pitfalls of not having a succession plan can ultimately result in the failure of the business’
‘A business succession plan often deals with sensitive issues, which can be emotional and hard to navigate – and as a result, tempting to avoid,’ says PwC tax director Beryl Power. However, she warns: ‘The pitfalls of not having a succession plan can be huge – and ultimately result in the failure of the business.’
PwC’s 2021 family business survey underpins this bleak picture. It found that just 33% of Irish family businesses make it to the second generation, and only 15% to the third. ‘These are frightening numbers when you consider that family-owned businesses account for about 50% of employment in the private sector,’ Power says.
Clarity and communication
It’s a concern shared by financial mentor Ted Dwyer, whose personal experience led directly to him becoming an adviser in the area. In the middle of the last century, the Dwyer family name was synonymous with business in Cork city, with a range of enterprises employing thousands of people. When the last of these closed in the 1980s, economic circumstances played their part, but so, too, did poor management.
‘There were four different branches of the family all owning shares, there was no clear leadership or planning, and some family members simply shouldn’t have been near the business,’ he recalls.
Dwyer stresses that a successful succession plan is grounded on clarity around the figures. ‘A family business will normally be big enough to provide only one stream of income. If a son or daughter is coming into the business, it’s important, firstly, that the founder has independent income outside the business – perhaps property or a pension – as they move away from it.’
Second, he says, comes the need for communication. ‘This is the biggest issue from my experience. A family member may not be entitled to a share in a business, but they are entitled to know where they stand regarding it.’
And while almost always there will be only one successor, this doesn’t mean a win/lose situation for everyone. ‘A family business owner will probably own other assets and, with the right planning, these can be shared with family members not going into the business.’
Dwyer also stresses the need for a viable plan B. ‘If a business owner doesn’t have someone to pass it on to, then it’s important to make sure the business is very saleable. Because if you can sell, you can you look after your family in other ways.’
‘Clients of small firms are traditionally very partner-loyal, not firm-loyal’
The key questions
- Which is the best option for a family business – family ownership with family management, family ownership with external management, or sale of the business?
- What is the ability of the next generation/key management to take over? Have skills gaps been identified and dealt with?
- What do family members – in particular, those working in the business as opposed to those who are not – want and need?
- How will current management ensure the succession plan is put into action?
- Have the tax implications of the plan – and ways to minimise the tax burden – been considered?
- How is the plan being communicated with key stakeholders?
- Is a professional adviser needed to develop and implement the plan?
For accountants in practice, succession planning almost invariably comes in the form of this plan B. Either partners buy into the practice or the business is sold outright. US research shows the accountancy profession is no better prepared than others when it comes to succession planning, with a 2016 survey finding only 6% of sole practitioners had a concrete plan in place.
Andrew Gray FCCA, chairman of UK-based firm Kirkpatrick & Hopes, has developed a new income and share ownership planning (Isop) model for handing over a practice or business. Isop, he says, goes ‘deeper into the psychology of succession planning’ and helps business-owners ‘face up to the need to plan for the future and their ultimate exit from the business’.
The Isop approach effectively transfers ownership to employees in a four-stage process. The gradual approach allows the business owner to carry on benefitting from the profits and continue to help steer the business, while freeing up more time for life outside of work.
Gray’s methodology for gauging the value of a business hinges on multiplying a modified annual profit with a price/earning (P/E) ratio. ‘A P/E of five is typical for good, small, privately owned businesses,’ he says, but adds a caveat: ‘Just because that’s what it’s worth on paper doesn’t mean that’s what buyers will be willing to pay!’
A matter of time
Gray suggests a five-year transition period for his Isop model, and US-based succession advisers Joel Sinkin and Terrence Putney stress that time is a critical factor for accountancy practices in particular, whatever the approach taken. ‘Clients of small firms are traditionally very partner-loyal, not firm-loyal,’ they point out, and that makes transitioning a client to a new partner or firm a matter of time as well as skill.
If 2022 signals a fresh start in the economy, key to this will be casting aside short-term thinking in favour of more long-term approaches. Sustainability will be the catch-all term for this. For many businesses, more robust succession planning will be critical.
ACCA runs online courses on succession planning for practices
Read Andrew Gray’s book on succession planning, Do More of What you Love
Read Accountancy Europe’s guide Looking to the future – business succession for family business