Welcome to the Simmons Gainsford Business Succession Seminar at Bruno’s Bar & Restaurant, Tradewinds from 5pm on Tu

1. Martyn Pizer Simmons Gainsford LLP Member, Chartered Accountant, Statutory Auditor (UK & Gibraltar). Email: martyn.pizer@sgllp.gi Grant Jones LLM. Simmons Gainsford Gibraltar LLP MemberChartered Accountant, Solicitor, New York Attorney, Licensed Insolvency Practitioner & Special Professor of Laws Nottingham University. Email: gmjones@gmjones.org LinkedIn: http://uk.linkedin.com/in/accountantarbitrator Welcome to the Simmons Gainsford Business Succession Seminar at Bruno’s Bar & Restaurant, Tradewinds from 5pm on Tuesday 8 April. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

2. Succession planning is one of the most complex and important decisions a family business owner has to make. In the US it is estimated that only 30% of businesses survive the second generation. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

3. Wealth does not pass three generations. It's rare that the wealth of a family can last for three generations (the 2nd may see the value of hard work, but the 3rd forgets it). The first generation works extremely hard, so that the second generation reaps the benefits. By the time the third generation arrives, the wealth is squandered. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

4. Develop the Plan. Once the goals, scope and constraints have been established, you can start developing the Succession Plan. We would always recommend taking professional advice at this stage. Discussing the matter with an advisor should help you clarify your thinking and identify any additional issues which need to be resolved. When developing the plan it is important to ensure that it is attainable and there is a clear timeline with measurable milestones. A good plan will allow you to achieve your aims whilst minimising the disruption to the operations of the business 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

5. Whilst the basic plan may set out an ideal outcome, it is important to consider what may go wrong. An obvious issue for succession planning is what happens if you don’t have the expected time, for example due to illness or death or divorce, for the plan to fully develop. Other potential risks should also be considered and appropriate precautions put in place Keyman Insurance on the owner-manager would allow for funding for additional management support should he be unable to continue. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

6. The first matters to be considered when planning the succession are: • Goals – what you trying to achieve • Scope – the extent of the business to be included within the plan. • Constraints – what restrictions are there on your choices & goals. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

7. If you have partners (either in a partnership or as other shareholders) which are not within the scope of the plan, then it will be necessary to consider what obligations you have to them under the relevant rules (either the partnership agreement or the company’s Articles) as these may restrict the options available. Consideration also needs to be given to the goals of next generation – both professional and personal – which may conflict with your intentions. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

8. A successful transition often requires long-term planning. Therefore it is vitally important to start early and keep the plan under review as events change. Family businesses often have complex values & cultures, which need to be considered – the combination of personal relationships, wealth and business has the potential to disrupt the family as well as weaken the business. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

9. 3 aims of succession planning: • Pass on wealth to family. • Create a lasting business legacy. • Realise retirement value. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

10. Who is to be the successor? Whilst the choosing of a successor will always be difficult, it is especially complex when family is involved. For the survival of the business it is essential that you objectively assess the potential heirs to determine if they have the inclination and skills to take over. Whilst it may be possible, given time, to remedy a deficiency in skill, if the new owner does not have the necessary interest in the business then trying to force them to take over will only harm the business and spoil their lives. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

11. Whilst, by definition, the 2 roles of owner & manager are combined in an owner-managed business, there is no requirement for this to continue to the next generation. Therefore, separate consideration needs to be given to the future of management & ownership. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

12. When selecting the future management, the essential factor is to identify the necessary skills for the top job – a technical ability in the operations of the business may not translate into a management role. Once these skills are identified, the necessary training and experience can then be planned. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

13. The Succession Plan should also include the contingency of the expected successor dropping out – the famous royal family model of an “heir and a spare”. Consideration should also be given to the use of professional management, if only as a stop-gap between one generation leaving and the next being ready to take over or in a “No 2” role to provide stability during a period of change. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

14. How can you structure the transfer legally? The optimal method of structuring the hand over will depend very much on the goals of the owner. It is also important to remember that “equal” is not the same as “fair”, especially where there are different levels of involvement in the business. • There are limited options available for transferring the ownership of a sole trader or interest in a partnership. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

15. However, if the business is incorporated, then there are more choices including the use of varying shareholdings and different types of share. In addition, a company structure opens the possibility of placing the shares within a trust structure for the benefit of the whole family whilst giving control to selected individuals. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

16. It is also important to establish an effective means of dispute resolution which will inevitably arise during periods of change. This is particularly important where the intention is to share the business between several different people, resulting in no clear controller & voting rights which allow a deadlock to arise. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

17. If realising the value in the business is important, then there is a choice between either the payment of a single lump or extracting value on an annuity / deferred payment basis. The single lump sum has the advantage of freeing the former owner to spend or invest the money how he considers best. However, freeing the necessary capital may cause cashflow issues for the business. Even if debt financing is available, this could hamper the business’s growth and leave it vulnerable. Alternatively, drawing a continuing income from the business restricts the choices available and is dependent upon the future success of the company – making it even more difficult to step away. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

18. During the preparation of the Succession Plan, consideration should also be given to longer term planning. In the future, one of the heirs may wish to divest themselves of their interest and, with divorces, deaths and remarriages, it is easy to image a scenario where interests in the business could be held by individuals outside of the family.   It may, therefore, be advisable to include restrictions on the future transfer of the interests in the business although this may require the other owners to acquire the interest. This would require provisions for valuing the business and the capacity for a purchase to be funded 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

19. When to make the transfer? You must have some ideas beforehand. A planned transfer of control should not be a sudden event. As the chosen successor develops, more and more control should be gradually passed down. A distinction should be made between: • Running day-to-day operations; • Overall control; and • Ownership 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

20. Successful successions normally involve an early devolution of day-to-day operations whilst overall control is retained. Not only does this help the successor to develop, but a fresh approach can modernise the company whilst the continued influence of the old guard acts as a stabilising force. However, it is during this period of change that disputes are likely to arise and a good mediator is essential. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

21. What of other stakeholders in the Succession Plan? The impact of the Succession Plan on other stakeholders also needs to be considered. In particular, key staff should be identified and their retention included within the plan. In addition, long term clients may need to be gradually weaned onto the next generation. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

22. What of taxation? The implications of taxation may also need to be considered if: • there are Non-Gib assets; • the intention is to draw an income from the business; or • retirement outside of Gib is planned. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

23. Final outcome. These considerations will result in a final outcome covering: • Who the baton will be passed to • How the change will be structured • When it will occur 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

24. What of the current position? Once the intended outcome has been determined, consideration should be given to the current structure of the business & whether this is the most appropriate form. For example, dividing the business into its component parts would allow different divisions to be split between children, whilst changing a sole trader to a company would allow for a more complicated structure. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

25. Once these decisions have been made, the initial Succession Plan can be drawn up. It should then be communicated to all of the stakeholders and kept under review in case the situation changes. In addition, a will should be drawn up to reflect your wishes . Despite the superstition, there is no evidence that drawing up a will shortens your life. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

26. Case Studies. In order to illustrate the points discussed, we would now like to turn to a few case studies which highlight the either their applications, or the results of their absence. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

27. An Estate Agent built up a business from small beginnings in the 1960s. He was later joined by his 2 sons, although his daughter had no involvement in the business This initially lead to clashes as the father found his control slipping away whilst the sons introduced modern technologies for the first time. These clashes lead to the elder son leaving the business for several years. Peace was only restored when the mother acted as a mediator to resolve the issues and the father & both sons are now working together to grow the business. The future plans for the business & the intentions behind them, have been fully discussed at family meetings so that all those involved understand. Different classes of share have been created to facilitate dividend payments to the father ,as a way of releasing his capital in the company. As the daughter is not involved in the business, she has no interest in the shares, but in compensation, is receiving a larger share of the other assets in the estate – a good example of including the business succession within the overall distribution of the estate. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

28. A far less successful example of succession involved a manufacturing business. In this case, the father died at a young age leaving the business to his son before he was ready. Whilst the son did his best to step into his father’s shoes, the business failed and a large proportion of the family’s wealth was lost. This example highlights the importance of a including a contingency within the plan in case the expected development time for the successor is not available. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

29. Alternatively, the appropriate choice may be not to pass on the business at all. We are currently dealing with a second generation business owner whose children have shown no interest in the business. We are, therefore, looking at how to dispose of the business whilst maximising the return to the owner. NOT! 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

30. Finally, we are currently involved in contingency planning with a client in case of his death.  This has included meeting with his family and key advisors in order to develop personal relationships & trust and to create a recovery plan. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

31. Martyn Pizer Simmons Gainsford LLP Member, Chartered Accountant, Statutory Auditor (UK & Gibraltar). Email: martyn.pizer@sgllp.gi Grant Jones LLM. Simmons Gainsford Gibraltar LLP MemberChartered Accountant, Solicitor, New York Attorney, Licensed Insolvency Practitioner & Special Professor of Laws Nottingham University. Email: gmjones@gmjones.org LinkedIn: http://uk.linkedin.com/in/accountantarbitrator Q & A at the Simmons Gainsford Business Succession Seminar at Bruno’s Bar & Restaurant, Tradewinds from 5pm on Tuesday 8 April. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar

32. 'Passing the Baton‘: A Simmons Gainsford Gibraltar Family Business Succession Seminar