Business SUCCESSION PLANNING and CONTINUITY. Survey

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Sybil Logan
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1 Business SUCCESSION PLANNING and CONTINUITY Survey

2 Introduction The last and often most important act in the career of a business owner is that of passing on his or her business. At the macroeconomic level, conducting such transfers properly is vital to safeguarding and preserving jobs. The transaction is, however, especially complex for the transferor, as it involves, first, taking the decision to transfer, then preparing the business for the transfer, selecting a type of successor (family, employee or outsider), identifying the successor within the selected type and, finally, reaching an agreement with that successor on the terms and conditions of the transfer. In addition, such transactions bring into play a complex body of legal and tax rules. Aware of these difficulties, the French legislature has, over the last years, made many advances by creating or enhancing numerous legal or tax regimes aimed at favoring (and even anticipating) business successions; but the practical efficacy of those advances had yet to be measured. Initiated by FIDAL s Wealth Management department, the purpose of this survey is to: collect business owners perceptions and expectations regarding the succession of their business; identify any potential impediments; ascertain whether they have effectively anticipated this process and have efficiently used the legal and tax mechanisms available to them; find out whether they have taken the necessary precautions in case a force majeure event occurs prior to the contemplated transfer. We surveyed our clients. 115 business owners, all over 50 years of age, answered our questionnaire. Among these businesses, 83.7% are SMEs and 16.3% are mid-market companies, which are overrepresented in comparison with VSEs (very small enterprises). The set of companies that responded to our survey is thus composed as follows: Indeed, the multiplicity of the legislative measures, their instability and the numerous preconditions they often impose the durations of which vary depending on the regime chosen can constitute as many obstacles to the business owner s ability to implement them in a timely manner. 2 SURVEY BUSINESS SUCCESSION PLANNING AND CONTINUITY

3 1 Characteristics of the business Industry sector 24.5% INDUSTRY (EXCLUDING FOOD) 0.9% B-TO-C SERVICES 0.9% BANKING, INSURANCE 2.7% HEALTH SOCIAL ACTION 4.5% TRANSPORT 8.2% FOOD INDUSTRY 16.4% B-TO-B SERVICES 22.7% TRADE 19.1% CONSTRUCTION REAL ESTATE 3

4 The business s workforce 35.5% OF BUSINESSES 25.5% OF BUSINESSES 22.7% OF BUSINESSES 9% OF BUSINESSES 5.5% OF BUSINESSES 2% OF BUSINESSES < 20 < 50 < 250 < 500 < 2000 < EMPLOYEES EMPLOYEES EMPLOYEES EMPLOYEES EMPLOYEES 4 SURVEY BUSINESS SUCCESSION PLANNING AND CONTINUITY

5 Size of the business SMES WITH 1 TO 249 EMPLOYEES 83.7% MID-MARKET COMPANIES WITH 250 TO 2000 EMPLOYEES 16.3% 5

6 1 Clear and defined succession objectives 51% TO SECURE A PLAN FOR THE FUTURE OF THE BUSINESS 32% TO GUARANTEE THE CONTINUITY OF THE BUSINESS 29% OTHER ANSWERS 20% TO OBTAIN A FINANCIAL PROFIT FROM THE TRANSACTION 19% TO MAINTAIN ECONOMIC PROFITABILITY 6 SURVEY BUSINESS SUCCESSION PLANNING AND CONTINUITY

7 QUESTION 1: What is the decisive element when passing on a business? 51% of business owners are more concerned about securing a plan for the future of their business than about the price they will sell it for or the financial revenue they will receive following the transfer. Ensuring the continuity of the business is the primary concern for 32% of the survey participants. The financial profit from the transaction comes in only third place, with 20% of responses. It should be noted that, for this question, the people surveyed were allowed to give several responses, and that obtaining the highest price for the business was never their sole response. Moreover, considering that concern for maintaining the economic profitability of the business also represents 19% of the responses, the search for a high sale price can be seen as quite a secondary motivation. These results corroborate what our lawyers often see on the field, as they regularly find themselves advising business owners who, mainly worried about passing on the business properly, sometimes tend to underestimate their own subsequent financial needs. Those needs, however, will often be sharply modified by their subsequent decrease in earnings and very significant increase in tax liability. Whether at the helm of a mid-market company or the boss of a small enterprise, business owners are generally very engaged in and aware of their economic and social responsibility. They are committed to ensuring the continuity of the business to which they have, quite often, dedicated a large part of their life and energy. 7

8 1 The right age to plan a business succession 52.3% 5.5% 25.7% 16.5% YEARS YEARS YEARS 60 AND MORE 8 SURVEY BUSINESS SUCCESSION PLANNING AND CONTINUITY

9 QUESTION 2: At what age should you start planning for your business succession? Over 80% of the business owners surveyed (83.5%) feel that it is necessary to plan for the succession of their business before the age of 60: 52.3% consider that succession planning should begin between 55 and % even think that the ideal age is between 50 and 54 i.e. well before the average retirement age. Contrary to the common belief that it is difficult for business owners to pass the baton, they appear to be fully aware of both the importance of transferring early enough and the advantage of anticipating this step. Business owners are, of course, well aware of the need to anticipate. In the day-to-day operation of their business, they must constantly anticipate in order to hold onto their technological edge, identify emerging markets, foresee societal changes, stay a step ahead of economic and political reforms, have a pulse on new trends, etc. Anticipation is a principle of economic survival in a business. What the survey shows is that today s business owner is also fully aware of the need to anticipate his exit from the business, which can be psychologically more difficult for him to contemplate. This awareness of the need to anticipate is very positive. Thanks to it, steps can be taken to better prepare the business for the event, in terms of organization and allocation of assets, so that it can get through this step under optimal conditions. In order to hope to benefit from certain tax measures that favor business successions, whether they take place free of charge or for a price, the business owner must also have anticipated them. Only by adopting this forward-looking approach will the owner be able to fulfill the preconditions imposed by those measures, which must often be fulfilled for a period of several years prior to the transfer itself. While this objective of anticipating the transfer is of major importance to the owners surveyed, other responses to the questionnaire suggest, however, that the tools available to achieve the objective are, in practice, used by a much smaller percentage of them. 9

10 2 What type of successor? 60% OF BUSINESS OWNERS WISH TO PASS ON THEIR BUSINESS TO SOMEONE WHO KNOWS PERFECTLY WELL HOW IT WORKS 9% 29% 21% A MEMBER OF THE FAMILY A PERSON SKILLED IN THE FIELD AN EMPLOYEE 10 SURVEY BUSINESS SUCCESSION PLANNING AND CONTINUITY

11 QUESTION 3: What is the profile of the ideal successor? Nearly 60% of business owners would like to pass their business on to someone who is intimately familiar with how it operates: a family member (29%), a person skilled in the same field (21%) or an employee (9%). These results corroborate the various findings seen throughout this survey: the owner s main objective is generally not to reap the biggest profit from the sale of his business but to ensure its long-term viability and to pass it on to someone who will successfully continue it. Choosing a successor with whom he has a family or business tie can, undoubtedly, give the owner a sense of better control over the future of the business and of avoiding too much change in how the business is managed. Passing on a business to a family member or an employee also has a symbolic value. The business owner no doubt gets satisfaction from seeing his activity carried on by a spiritual son. 11

12 2 What type of transfer? 32% OF THE SURVEYED BUSINESS OWNERS EXPECT THE TRANSFER TO TAKE THE FORM OF A FAMILY SUCCESSION 32% FAMILY BUY OUT FREE OF CHARGE FOR A PRICE 12 SURVEY BUSINESS SUCCESSION PLANNING AND CONTINUITY

13 QUESTION 4: How do you expect to plan your business succession? 32% of the surveyed business owners plan to transfer their business by way of a family succession, whether for a price (transfer of shares or sale of the business or of a holding company), free of charge (gift, bequest, inheritance) or a Family Buy Out (FBO) so as to conciliate the two goals of ensuring a family succession and maintaining the parents lifestyle. In practice, however, our experts see that around 15% of businesses are actually passed on to the family. There thus seems to be a significant difference between the desires of the persons surveyed and what happens in reality. There may be several reasons for this. Family successions may prove to be much more complex to implement than the business owner had initially thought. Choosing which child will be most able to follow in the parents footsteps is often a major dilemma. Sometimes, none of the children aspire to run the family business, thereby pulling the plug on all plans for a family succession. Once a successor has been chosen from among the children, he or she still has to become accepted within the company, a process that is often initiated before the share capital is actually transferred. It is therefore particularly important for business owners to plan ahead as much as possible if they wish to implement a family succession, so as to have the necessary time for this learning process and for securely setting up the extremely favorable tax regimes that have existed for several years now ( pactes Dutreil, deferred and staggered payment, etc.). 13

14 2 Obstacles to business successions 18% LACK OF SUCCESSORS TAX BURDEN COMPLEXITY OF THE LEGAL & TAX REGIMES COMPLEXITY OF THE BUSINESS OWNER S MARITAL & ESTATE SITUATION FINANCING DIFFICULTIES FOR THE SUCCESSOR 44% 16% 22% ECONOMIC UNCERTAINTY 14 SURVEY BUSINESS SUCCESSION PLANNING AND CONTINUITY

15 QUESTION 5: What is the main obstacle to a business succession? The tax burden, the complexity of the applicable legal and tax regimes or the business owner s marital situation or estate are the main obstacles for 44% of the surveyed business owners. Passing on a business may seem particularly complex for a business owner who does not have a solid grasp of the legal and tax environment. The very technical and fluctuating nature of the tax regimes that the legislature has set up over recent years, with the aim of facilitating business successions, is a sizeable obstacle to their use. This is regrettable because, when used well, they are particularly efficient. The current tax environment for family business successions is extremely favorable compared to what existed prior to The obstacle of economic uncertainty accounts for 22% of the responses. This can be explained simply by the difficult economic climate and the prudent attitude of financial institutions, which in turn leads to financing difficulties for the successor, an issue raised by 16% of the survey participants. In this respect, family successions are generally much easier to finance for successors who receive part of the value in the form of a gift. 18% of the persons surveyed indicated a lack of successors. This probably concerns mostly low-profit companies or small businesses with less than 20 employees, who may sometimes be difficult to inherit considering their close links to the business founder. So the solution for business owners is to get expert assistance during the preparatory phase, in order to ensure that the succession process is handled in the best conditions. This will guarantee optimal tax treatment by making the right choices early enough, so that the business owner can benefit from the expected preferential treatment when the transfer is carried out several years later. Ongoing specialized assistance, from the preparation stage to the actual transfer, will also enable business owners to reposition their strategy in case the regulations change. 15

16 3 Lack of protection for the business owner s assets in case of unforeseen events NO ACTION TAKEN TO ENSURE THE CONTINUITY OF THE BUSINESS 41% 0.6% 15% BADLY PREPARED SUCCESSIONS POWER OF ATTORNEY WITH POSTHUMOUS EFFECT 16 SURVEY BUSINESS SUCCESSION PLANNING AND CONTINUITY

17 QUESTION 6: What have you planned to ensure the continuity of your business in case of force majeure: death, incapacity or divorce? 41% of business owners have not taken any action to ensure the continuity of their business in case of force majeure. There are, however, some simple and very effective tools available for doing so. For example, a power of attorney with posthumous effect is a planning technique that can help prevent conflicts from arising among heirs. It allows the signatory to freely designate the person(s) who will be in charge of managing his assets after his death. It is a simple contractual formality, a sort of insurance which costs nothing and takes effect only in case of death. However, only 0.6% of the survey participants said they had set one up. Business owners undoubtedly, but mistakenly, expect such formalities to be time-consuming and costly. Their unawareness of certain tools and the complexity of understanding others (Pactes Dutreil for example) may explain why so few business owners have taken advantage of them. It also seems safe to surmise, without overly speculating, that there may also be a certain cultural obstacle to doing so and a natural reluctance to planning for such unpleasant situations. Once again, the technical complexity should not be perceived as an obstacle, because such a perception could expose the business to serious problems or even to its complete demise if a serious, unanticipated event were to occur. It is therefore particularly regrettable that, while business owners do not hesitate to take out insurance when borrowing funds to purchase real estate, so as not to leave debts for their heirs, they do not take the necessary steps to protect and ensure the continuity of their business when it is entirely within their reach if appropriate advice is sought, and for a very limited cost compared to the risks at stake. We estimate that 15% of business collapses are due to badly prepared successions. 17

Contacts 4-6 avenue d Alsace 92982 Paris La Défense Cedex Tel : 01 46 24 30 30 Fax : 01 46 24 30 32 www.

18 Contacts 4-6 avenue d Alsace Paris La Défense Cedex Tel : Fax : SURVEY BUSINESS SUCCESSION PLANNING AND CONTINUITY FIDAL 2015

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