Careful planning is essential when arranging the handover of a family-run business to the next generation, writes Caroline Madden

It is sometimes said that the first generation starts a family business, the second generation builds it and the third generation kills it. It's a sweeping statement but all too often it turns out to be true.

In Ireland, nine out of 10 indigenous businesses are family-owned and they account for 50 per cent of employment in our economy. These enterprises range from tiny corner shops to heavy hitters like the toy retail chain Smyths, the Barry's tea dynasty in Cork, and international players like the Quinn Group.

Despite the many high-profile success stories, only 33 per cent of all family businesses survive to the second generation and a mere 15 per cent make it to the third generation.

Why do so many family businesses fail when the time comes to pass on the torch? One simple reason is that business owners tend to struggle if they have several children. Deciding on whether one child should succeed them or whether the business should be shared out equally can be a major stumbling block, says John White of JBW Accountants in Dungarvan.

Typically, carving up a business into equal portions isn't viable from the business perspective, he explains.

So what can business owners do to avoid sibling rivalry and ensure a smooth transition? "It's about communication," White says. "It's about identifying the successor at an early point, communicating with them and finding out what their intentions are, whether they would wish to take over the family business and then getting them to actually take a career path that would allow them to do it."

One school of thought suggests that the successor should actually leave the family business for a number of years, gain as much experience as they can elsewhere and bring this new learning and knowledge back to benefit the business when they take over.

On the other hand, family companies tend to be "people businesses" and building up strong customer relationships over the years can be critical.

There is no set rule as to which career path is right or wrong, White says. It depends on the particular situation, but family members should sit down, and tease out which approach best suits their business.

Other family members, and not just the successor, need to be kept in the loop too and informed of the succession plans, so that their expectations are not over-inflated, he adds.

Another potential pitfall is the issue of retirement. "Retirement and succession go hand-in-glove," White says. "You've got to retire in order to be able to hand over the business, but you can't retire on fresh air."

Planning how to free up cash from the business to fund the owner's retirement once they step down is an essential part of a successful exit strategy.

"One of the more favourable routes for retirement funding is to use the whole pensions mechanism," he says. Whatever route is decided upon should be agreed with the successor, and its impact on the business must be considered. "With any business, there are cash flow issues," White says. "You've got to make sure you manage your retirement as well as the cashflows of the business, and not take your retirement fund out to the detriment of the business."

While, traditionally, people tended to retire in their 60s, the growing level of affluence in the State means many business owners intend to stop working by the time they reach 55. Whatever their timeframe, White says that people need to start planning their exit strategy a decade before they hope to retire.

So those who plan to retire in their 50s need to begin formulating their succession plan by the time they reach their mid-40s.

Not only will this 10-year lead-in period enable them to select the most suitable successor, and begin providing for their retirement, it will also allow them to ensure they meet the conditions to qualify for retirement relief from capital gains tax.

Handing down a family business to the next generation is fraught with difficulty and is an emotional issue for all involved. However by planning a succession strategy, business owners can successfully bridge the generation gap and retire in the knowledge that their business can continue to thrive.

The Irish Times Business 2000 - 10th edition

The Business 2000 column provides information for business studies teachers and students on the current business climate.

It is intended to complement The Irish TimesBusiness 2000 multimedia resource package developed by Woodgrange Technologies, which is sent to all second-level schools and selected third-level institutions.

Business 2000 is published every Friday in the Business This Week supplement. The teachers' support desk at Woodgrange Technologies can be reached at 01-4352514 or by e-mail at: business2000@woodgrange.com.

Companies participating in Business 2000 are: AIB, Amway Ireland, Bord Bia, Cadbury Ireland, CRH Group, Dell Ireland, Department of Health & Children, Diageo Ireland, Enterprise Ireland, EU Commission, Financial Regulator, Glanbia, GlaxosmithKline/Lucozade Sport, Hibernian, Local Government Management Services Board, Labour Relations Commission, Musgrave Group, National Development Plan, National Roads Authority, NTMA, Office of the Revenue Commissioners, RTÉ, Vodafone.