One of the biggest challenges for family businesses is choosing how to pass the company onto the next generation, balancing the needs of the individuals involved as well as the company’s interests.
There’s a huge proportion of people in the UK who haven’t made a Will, but such a disinclination is likely to be even more prevalent among family business owners, since the process of deciding on the details is likely to be even more tricky – there may well be a tension between commercial and emotional priorities. It can be even more daunting if the business owner has several children, since then the concept of equality comes in too.
However, doing nothing is not an option, since leaving the company’s fate to intestacy rules may mean that the business does not pass to the family member who is best-placed to continue it, sometimes even meaning that it must be sold. The earlier in your business’s development you begin a succession plan, the easier it will be. Five years prior to retirement should be considered a minimum, and ten years would be even better, since the process is likely to be smoother and more successful when given more time.
To identify your succession objectives, you’ll first need to ask yourself a number of questions. When would you like to retire? Would you want to continue working in the business in some capacity or other, maybe in a consultancy role? What are your financial needs likely to be during retirement? Are you fully prepared to hand over control of the business, or do you need other activities to help fill the void? What are your spouse’s needs? Are there any family members not actively involved in the business, but who would want to retain an interest? And finally, is family succession the best option or might you consider a sale?
It’s also a good idea to begin with a family consultation, so you can consider the feelings, ambitions and wishes of everyone involved. Make sure you keep them all involved throughout the process too, as the plan develops – you might want to consider setting dates for formal succession meetings, and creating an agenda for each, to make sure everything stays on a business footing.
The resulting plan should set out your key objectives for the succession process, and outline a timetable from the identification of a successor through a staged transfer of responsibilities. It should also detail any contingency plans deemed necessary (for example, what if your preferred successor has other plans?), a leadership and development programme for your successor, your exit strategy, the successor’s role and responsibilities, and the ownership structure.
When it comes to identifying your successor, try to choose an individual whose skills and aptitudes make them the best choice for the business – this may be your first-born child, but equally it may be another family member. If no-one within the family is willing and able to take on the responsibility, you might need to consider preparing your business for sale instead. However, there is another option – a partnership agreement can ensure the succession of a business can be chosen on a commercial basis without affecting the family’s inheritance.
If you’d like to find out more about how we can help support you in your succession planning, including asset tax strategies to help you minimise tax liability, please talk to our Business Advisory department.