SUCCESSION PLAN VITAL FOR BUSINESS

Topics covered in this article: Business Owners, Employment

Owen Cooney

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Phone: +64 7 927 0548
Email: ocooney@clmlaw.co.nz

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Bachelor of Laws, University of Otago

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Much has been written about the need for family businesses to have a good succession plan.  In ‘Decoding Family Businesses,’ (Auckland University NZBL126) Rebecca Hirsch states, “a lack of longevity of New Zealand family businesses detrimentally impacts on the country’s economy in terms of provision of employment, GDP per capita as well as business growth”. 

Increasingly this message is being heard by many family businesses who are actively implementing succession strategies, although this is not unique to only Family business, any business of any scale needs a good succession plan and with the Baby Boomers slowly exiting, plus changing technologies and their impact on business, a need for planned transition (often over a period of time) is becoming more and more important.

Many of the same issues are appearing in non-family businesses as they do in a family business.  The most common being an inability to let go, which is the most cited barrier to effective succession.

Succession in this context can be either succession of ownership and/or management internally, or the grooming of the business for sale to a new, third party successor. Rather than an outright sale, it is becoming more common that key staff or management are the exit strategy. Any form of transition should not happen overnight and it needs planning, discussion and commitment. From the incumbent’s point of view it is much easier to let go if the first stage of the transition is not too intimidating. An initial stage lets everyone get comfortable with change, allows the incumbent to assess the contribution of the successor/s and the successor/s to gain confidence over time.

Two of the best ways to enable a staged transition to happen are:

(a) Development of a management succession plan which is implemented over time before ownership succession is brought into play.  It is easier for the incumbent to implement management succession if they still retain control of ownership of the business; and/or

(b) Often in conjunction with management succession, to transfer ownership of a small percentage of the business to a successor (often a key staff member). This is generally a win-win situation whereby the incumbent benefits financially, the successor/s have an increased level of commitment and ideally a share of profits – thus encouraging a positive contribution.

Having an initial stage provides the opportunity to set a review date to allow a progress assessment of the initial stage. If all is going well, then the incumbent may consider moving to a further stage.  If not, then the incumbent can either defer making further decisions until the desired outcomes have been achieved or, alternatively, reverse the arrangement or formulate a new director.

The Financial Markets Conduct Act 2013 is relatively new legislation which now covers every transfer of share ownership or issue of new shares to third parties.  Generally the legislation should not prevent such arrangements as there are a number of exclusions that most situations can fit within. It is, nevertheless important that compliance with the requirements of the legislation is strictly complied with, to avoid falling foul of the wide powers that this regulator now has.