Many businesses try to foresee and plan for the future but unfortunately organisations often do not plan for the inevitable.
Where ill health or death is concerned, business owners and partners frequently fail to take a pragmatic approach to business succession planning.
Without a clear steer, businesses do not sort themselves as people may think. Even where an organisation is family-run, inheriting a company without a succession plan can be a heavy and overwhelming burden to bear.
At a time when many businesses are focused on staying economically viable, it’s important to remember that storms do pass and owners should continue to keep an eye on the bigger picture. If the business succeeds and succeeds its owner(s), it is crucial to have a plan in place, not only for those that inherit the business but also for employees, suppliers and all those who rely on the survival of the organisation.
Taking the following five steps to successful business succession planning is essential.
A useful, well-constructed succession plan will take at least a year, and it can take longer if there are difficult family or working relationships to navigate. A good succession plan will aim to derive all of the value of the business. You can then either release this value, giving you capital to rely on or it can be invested in the business to give you an income on which to live.
Establish your successors
Succession planning is also about who you pass the reins to. If you have built the business from the ground up, there can be a very emotional connection to it; to whom do you entrust your life’s work? Is it your children, your spouse, your business partner, your employees or is it your executors and trustees? This is often the sticking point for people in planning. You need to consider who is best placed to continue onwards and drive forward your business.
Be open and honest with successors
Ideally this would be your family or business partner but sometimes people do not want or need these responsibilities. It is therefore crucial to have open and honest conversations with your successors at least three years in advance of your proposed retirement from the business. This time will give your successors opportunity for them to develop a plan and to make sure they have the time, skills and money required to carry on your business. Planning this early also allows you to come up with a plan B in case your successors do not feel able to succeed you. You can then look at alternatives such as the sale of the business as a going concern or a management buyout.
Get your business in the best possible shape
Before your plan goes into action it is important that you consider how to get your business in the best possible shape to succeed. This means looking not only at the business itself but also any processes and policies you have, and the people who will be left to manage and implement those. You need people who are competent and who will look to continue to build and grow your organisation.
Seek professional advice
As always, take advice on your succession plans. You will need to speak with both legal and financial advisors who will be able to guide you through each and every consideration in your plan. It may be the case that you need to set up certain legal agreements and consider the taxation aspect of your departure from the business. A well-rounded legal advisor will be able to take you through your options and give you the tools to make a fully informed decision. The process isn’t solely about the future of the business; it is also about your future. You therefore need to ensure you get enough from the business financially, and this may impact on your decision to either take your capital or invest it in the business to produce you an income. Expert advice here is essential as these choices can affect your tax position.
In the round
The importance of succession planning cannot be over emphasised. You need to start to plan as early as possible and get the wheels in motion at least a year before your proposed departure from the business.
With open and honest discussions with your successors and your legal advisors you will be able to transition out of your organisation knowing that you have done so at the best time for you, having left the business in the best position to grow and continue to be successful.
Jill Rushton is a Partner with Stephensons Solicitors LLP, specialising in high net worth estates and inheritance tax, estate administration, wills and estate planning, powers of attorney, Court of Protection and trusts.