Keeping it in the family

Family-run firms are the UK’s weakest link! Or at least that’s what research from the London School of Economics (LSE) has found. Poorer management quality from second and third generations are reported to make these businesses “less well managed and less productive”.

IFAs, an industry with its fair share of family firms, are no different from any others in needing to make the best decision for the future of the business when thinking of succession – and this is being brought into even sharper focus with the fast-approaching retail distribution review (RDR) implementation deadline.

Effective succession planning is all about focusing on the needs of the business, asking yourself the right questions and being prepared to make some tough decisions. Leave it too late or make an emotionally-led appointment and you can unravel all the good work you sweat blood and tears to achieve in building up your business.

Giving way to family bonds often end up with the wrong people being appointed to the wrong roles, which can have a detrimental effect on the business. While suggesting that a favoured son or daughter may not be the best person to take over the reigns may be tantamount to throwing a grenade into the room, the issue is too important to not be subjected to the same scrutiny as for other business critical decisions. 

Being focused on a clear course of action can make it easier, but no less difficult.  We’ve had cases of clients bravely telling the next generation down that they’re not right to take over the business. Recently a valiant client made his sons redundant from the company following concerns that they would not be able to run the business in the right way. Instead he chose to sell the business to a trade buyer as he felt that this was in the best long term interests of his family.

There are a number of business transfer options for IFA owners to contemplate. These include transfer or sale to family; sale to non-family (the existing senior management team through an MBO), or a ‘trade sale’ on the open market. 

Another option, not always considered by IFAs is a Vendor Initiated Management Buyout (VIMBO) which can smooth the transition between owners.  Unlike a conventional management buy-out (which is usually initiated by the management team making an offer to the owners), in a VIMBO situation the process is reversed.  The vendor and vendor’s advisers offer the management team the opportunity to buy the business on terms set by the vendor. This allows the owner to dictate the terms of the transaction, which usually means a better price.

In all cases, succession planning well in advance is vital in order to understand the options available and maximise the sale price of the business whilst making the transfer as smooth as possible.  One action we often find helpful in succession planning is to offer management teams the option to buy shares.  These options can be structured in a tax-efficient manner and they give ownership rights to the business, but only at a future point in time. So, if the managers leave beforehand, they lose their ownership rights. Consequently, as a business owner you lock in loyalty, continued interest and the commitment of the management team to grow the business throughout the process of the sale of the business.

Despite the LSE’s comments, family-run businesses in the UK were praised last month by Vince Cable for their “culture of long-termism” and this is apt for the IFA sector where the focus is advising clients on the long-term.  However, with the RDR about to change the landscape, family owned IFAs will need to consider their own positions to ensure the future is as rosy for their own businesses as it is for their clients’.

Oliver Hoffman, Corporate Finance Partner at Mazars