Business Succession Planning

Published Date 31st January 2007

Whether your retirement plans include improving your golf handicap or spending more time with the family or even if you dread the idea of letting go, it is inevitable that the day will come when circumstances demand that you take action for the future of your business. Retirement is one of  the great milestones in any person's life and it is never too early to start planning. The decisions you make now can affect your future and impact upon the careers of your family and employees.

 

A good succession plan is one which will prepare for the smooth transition of ownership and control of your business to a family member or employee while ensuring that you receive the financial rewards you deserve from your years of hard work in building the business

A seven point-plan

1.Plan for your future financial security.

Now is a good time to begin to establish financial resources that are independent of your business. These should include a pension scheme that is tailor-made for you and your family's future needs. There is a wide choice of pension schemes available in the market that can offer tax relief, lump-sum payments or index linking. Also, make an assessment of your insurance cover to see if it is adequate to cover your financial needs in the event that illness or disability forces your early retirement. Talk to your accountant, financial advisor or bank about the best options for you.

2.Make a will. 

Formally setting out your wishes now, for the future of your estate on your death will save a lot of expense, problems and difficulties for your family. You can make your own will but it is generally better to seek advice from your solicitor.

3.Identify whom you will pass the business on to.

To avoid future disputes or disappointments it is usually better to identify a candidate as early as possible and to discuss your plans with the whole family. One of the primary qualifications of your replacement, will of course be his or her willingness and ability to take on the responsibility and to build on your achievements.
Ultimately, whether your child follows in your footsteps or not is a decision that only she or he can make and grooming your child from birth is not always the best method of securing a successor. Often, your successor will have a different vision of how the business should be run and a different idea of how the business should develop in the future. This can sometimes be a source of friction but, again, early discussion and consultation will often help to avoid future trouble.

4.Prepare your successor. 

Transferring ownership of your business is often a straightforward operation. However, transferring control while ensuring the continued success of the business once you leave takes planning and preparation. Your successor is the key to this success and will need to be groomed well in advance for the position and the responsibility of carrying the business into the next generation. Apart from commitment and enthusiasm, she or he will need to be fully acquainted with every aspect of the business's administration and operations.

5.Prepare your business. 

Every aspect of your business will need to be prepared and ready for the transfer of control. Make an assessment of the likely impact your departure will have on the business. How much of your business depends on your personal input? For instance, will your departure mean that long-standing and valuable clients and customers look elsewhere? You can minimise this risk by introducing your successor and key employees to your network of clients and customers and building up a business relationship that is not solely dependent on you. You may need to consider providing adequate extra capital for the business to get over the initial transition period and overcome any teething problems that may arise.

6.Identify advisors. 

The process of formulating a viable succession plan will require outside advice and consultation. Talk to your solicitor and financial advisor about each aspect of your plan and preparation.

7.Plan for your retirement. 

Letting go of a business can sometimes be a difficult and even traumatic change in a person's life. It can also be an opportunity to explore areas of interest that had to take a back seat while you were busy making a success of your business. Before your retirement is a good time to develop these interests and to start to channel the skills and talents you have picked up over the years in other directions.

Selling up

If, after long consideration and advice, transferring your business to a family member is not your preferred option, selling the business is also an alternative that requires careful planning and preparation. In order to maximise your return from the sale of your business there are a few points to consider.

• Timing of the sale can be crucial. Consult your financial advisor as to the best time to sell.
• Have a professional assessment report drawn up listing the tangible and intangible assets of the business.
• Look around for potential purchase candidates. A business will have different values to different potential buyers.
• Set the price you will be asking for the business in a way that you can easily defend.

Succession and Taxation

Transferring all or part of a business to a family member can attract liability to taxation. However, the impact of this can be reduced, with some careful planning and preparation. You will need to seek independent advice from a qualified tax advisor, accountant, solicitor or financial advisor on the tax implications of succession.

This information is based on our understanding of current Inland Revenue Practice.

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