30th July 2018
Many day-to-day tasks are involved in preserving your business, from sourcing new clients to managing inventory, marketing products and maintaining accounts. Yet, succession planning – one of the most important tasks for future proofing a business – often gets pushed to the side.
Frequently, this is because succession planning can feel like a difficult topic to approach, perhaps because it involves planning your replacement, facing the concept of mortality, navigating family or office politics, or simply preparing to hand over the reins of a business that you’ve worked hard to grow. However, these are also compelling reasons to plan your business’s future effectively, ensuring its preservation and long-term success.
The importance of succession planning
Creating a succession plan can bring many benefits, from financial assurance to improved family relations, in the case of family-run businesses. One of the biggest advantages of developing a succession plan early on is that it provides an opportunity to clarify expectations and outline future roles. This can be particularly important in family businesses, as it enables discussion and ensures conflicts can be resolved in advance, thereby preventing costly legal disputes at a later stage. Succession planning also increases the likelihood of long-term business success because it allows people time to understand the practical skills and industry knowledge they need to develop in order to take on leadership roles.
In terms of managerial efficacy, succession planning will also encourage you to adopt a strategic, long-term approach to business management. By outlining your business’s future, you can assess any developments or changes that occur along the way within this broader framework, providing a long-term view that strengthens the business’s future survival. For example, you may decide to streamline non-core activities, or expand or diversify the business to carve out different areas of responsibility. Additionally, you may make more proactive financial management decisions, ensuring business and ownership structures are tax efficient to reduce the tax burdens of inheritance. By establishing a clear vision and revisiting your succession plan frequently, it will also be easier to make sure you provide sufficient handover time to allow a smooth transition process.
Succession planning – key pointers
A succession plan isn’t a finite document, it should be revisited at regular intervals and adapted in response to changes to the business. If it is a family business, the succession plan should also be modified to accommodate changes to your family structure brought about by marriages, divorces, births or deaths. A well-considered succession plan should contain options for different eventualities and be used in combination with wills, trusts and pre- and post-nuptial agreements, where relevant. In addition, insurance can be a useful tool in succession planning.
To ensure your business is carried forward as you intended, you should carefully document the proposed business arrangements in company articles, a shareholders’ agreement or a partnership agreement, depending on your business’ structure. As with your own will, the wills of any other shareholders should also take into account the business succession plan. If passing on a family business, carefully drafted governing documents (such as a partnership agreement, company articles and/or shareholders’ agreement) can help maximise inheritance tax reliefs and set out irrefutably what is owned by whom.
If separating out parts of your business to share among your successors, you may want to consider how to diversify business interests to maintain or increase profitability. This could be, for example, through increasing or divesting real estate holdings, using agricultural land for sustainable energy generation or varying your retail operations. If your business has multiple partners who might wish to retire at different times, there are several options available to manage this transition, including buy/sell agreements or a staggered transfer of ownership.
It’s important to have a thorough understanding of how tax laws (such as inheritance tax, capital gains tax, income tax and corporation tax) may impact your succession plans. This should be revisited regularly as tax law is subject to constant scrutiny and change: it’s advisable to seek accounting or legal advice to ensure you’re fully away of all tax implications. In more general terms, it’s also important to solicit legal advice early on in your succession planning to make sure the process is clarified and handled in the most efficient way possible. This will help you take into account all legal and financial implications while also providing support that can make the process easier to manage.
A poorly managed transition can trigger any number of issues, from leadership conflict to family tensions to business failure and financial loss. If your retirement plan relies on dividends or other income from your business, the effect of post-transitional financial losses could be particularly damaging.
Although it may seem difficult or overwhelming to consider succession planning, it’s never too early to do so. Addressing the matter of how your business will be run once you are no longer in charge provides a crucial opportunity to manage expectations, set out responsibilities, make asset ownership clear, reduce possible conflict and maximise financial opportunities – for you, your business and its successors.