Passing your business on to the next generation is not as simple as handing over the keys. Rachael Taylor reports on the legal labyrinths and emotional highs and lows of succession planning.
The headline of this article is somewhat misleading, because the moment you decide to step back from your business is the very worst time to plan your exit.
That process should have begun many years before, when your career was at its height. Succession planning is a hot topic in the jewellery industry, and it’s easy to see why. The majority of the retail landscape and a lot of jewellery suppliers are controlled by family businesses, and for most who have built a successful company, the dream is to pass it on to a family member who will help it continue its journey towards becoming a second-, third-, fourth- or perhaps even fifth-generation business.
If we consider succession planning with the family aspect in mind, this not only throws up tax, legal and financial considerations, it also involves a lot of emotional baggage, even for the smoothest of handovers.
“It was quite a traumatic time,” remembers Jeremy Morris, second-generation owner of Bond Street jewellery house David Morris, who took over the business from his father David 10 years ago. “I think it’s always difficult to let go of something that you’ve built up. It becomes like your child and I think to a certain degree my father’s still struggling with it.”
Despite the emotional weight of the handover, Morris says that the process was relatively simple. He had been working in the business since he was 18 years old, starting out as an apprentice on the bench, and had a solid understanding of how everything worked, making him a natural successor.
The father and son appointed a nonexecutive director to liaise between them to hash out the details of the succession plan, which Morris believes made the process much easier. He does admits though that it was a feeling of complete relief when the final papers were signed. “It’s very difficult to have conflict over every decision made,” he says. “It’s much easier to run a business when its one person’s vision and one person’s decisions. It was also quite exciting to know that I could now grow the business the way I knew it had the potential to grow.”
While Morris gave his father a few shocks with the new direction – “when I decided to sell the whole watch side of the business so I could focus on the jewellery, this wasn’t foreseen by my father” – and some clients expressed disappointment at not being able to deal directly with David any more, the jewellery house’s client list remained mostly unchanged after the hand over. The company has continued to go from strength to strength in the past decade, investing in international expansion, and in July last year it opened its second boutique in Hong Kong.
While Morris was the natural successor at David Morris, the choice is not often as clear cut at many other businesses. Perhaps there might be more than one child that it could pass to, or neither seems to have a particular flair for leadership. There is also the option of passing the business on to someone outside of the family, such as a store’s manager or a talented sales director.
Picking the right successor is key, not just to the future success of the business but also to ensuring that you are not weighing the next generation down with a business that they do not want. “The key is to never push your kids into it; gently ease them into it, trick them into it if you have to, but never push them,” says Jeremy France of Jeremy France Jewellers in Winchester, who is currently planing in advance for his exit from the business. “I’ve seen other peoples’ kids pushed into it and they leave straight away.”
France, who has two children working in the business, had actually semi retired in 2013 and was working two and a half days a week, but when the opportunity arose to move to a more prominent location within the town, the rush of business that came with the new store had him back in the business full time. However, he is still planning his escape to a life of international travel and ski breaks, so succession planning is very much at the forefront of his mind.
Each of France’s children – 27-yearold Harriet France and 26-year-old Chris France – play a very different role in the store, with Harriet, who studied for a degree in business management, working on the strategic side while Chris is in the workshop heading up jewellery repairs, which France says is a hugely busy part of the business.
As teenagers, France says Chris was more likely to stay at home playing video games, while Harriet spent her teens working her way up in the business from cleaning toilets and making coffee to now ordering stock and heading up the company’s HR policies. This makes her the more likely candidate to take over when France retires and the two have been working closely together to make sure that the handover is as smooth as possible. “I’m lucky that Harriet is a big burning torch and it’s great to know in a few years’ time that I can leave her alone,” says France. “The beauty of today is that no matter where in the world I am, I’m only a day away or on the end of the phone.”
France describes his daughter as starting out as a sharp, square block that he is continuing to sand the edges off, and once they are completely gone she’ll be ready to lead solo. But there are also financial implications as to the timing of France’s exit, tied into the extra capital that was required to move to the new store location. “We were appallingly let down by the bank,” he explains. “We put £40 million through their books in the past 20 years and yet they didn’t feel they could lend us money, so we structured loans through private enterprise and pension plans. What it does is leave you with stringent repayments. We’re two years into our five-year repayment plan so there is the potential to start relaxing in three years’ time.”
Structuring the finances of a business to allow for a change in ownership is one of the most important elements of succession planning, and is the main reason that planning your exit should be done years before you make a decision to retire.
Richard Elliott is a partner at London law firm Gordon Dadds, which has advised on many business sales. His number one piece of advice for those hoping to one day pass on a business to a family member is to take advice early, from both legal and accounting professionals, and work with your chosen successor to ensure that they fully understand the business they will be taking over.
“We would suggest that the sons and daughters should get involved as early as possible to learn the business over time and sit on the board as directors,” says Elliott. “What is more difficult is the ownership side of things. They need to be taking some tax advice, as if they transfer shares, they may need to pay tax on that share and stamp duty, plus capital gains tax.”
Most business owners have their pensions wrapped up in the business and when it comes to planning an exit there are a number of ways to release capital, each with its positives and negatives for both parties. While a direct sale of the business from one party to the other is perhaps the most simple method, it may not be possible for the children to raise enough funds to do this outright, and it might also not be the most tax-efficient solution.
“It very much depends on the situation and whether they have been planning this over the years,” says Elliott, who advises that the smart, long-term solution is to build up a pension fund in advance by steadily putting money aside over time. “It’s not straight forward, so you need to think about it. What is your current situation? What do you want to do? How will you afford it? It might be that the best way is to do it is over time. Say a business is worth £1 million; you might say I want to sell it to you and what I want is £250,000 now and then stagger the rest of the payments.”
Other options could be the issuing of new shares to the children, or for those with high-worth businesses to set up a trust fund. The best method very much depends on the individual, which is why Elliott advises taking advice early and suggests that the first port of call should be an accountant or pensions advisor rather than a law firm. With family businesses, as Jeremy Morris discovered when he took over David Morris, there is also the issue of the name above the door, and when that named owner exits it can have a detrimental effect on the valuation of the business. One way to get around this, according to Elliott, is to agree on a consultancy deal that would mean the exiting owner would agree to be available to consult for a set period of 12 to 24 months to help with the transition. The financial angle here is that while the exiting party would receive a lump sum on leaving the business that could be lower than what they believe the value of the business to be, it could then be increased in the future depending on the business hitting certain financial milestones.
For those who haven’t planned in advance and can’t raise the funds to pass the business on in a way that will support their pension plans without saddling their children with insurmountable debt, there is the option of selling to a third party from outside the family.
Alternatively, they could pass on their shares to the next generation through death, although this would then be subject to a 40% inheritance tax unless passed to a spouse. And for those who do this, they will most likely still need to be paid a salary from the business whilst on retirement, which will put extra financial pressure on the next generation as they have to find extra funds to pay for an additional member of staff on top of this.
“It requires advance thought,” affirms Elliot. “If you have the right advice far enough in advance, you’ll put provisions in place and take more money out of the business in a tax-efficient manner.”
While planning your exit as you chart your rise in the industry might seem backwards, those who leave succession planning to be done at the same time as retirement planning, might find that the pathway to their golden years might not be quite as easy or as well-funded as they had hoped.