Succession Planning for Family-owned Businesses

Family-owned businesses are a huge part of the UK economy and can vary significantly in size and industry. A family-owned business could be a small independent shop or an international corporation operating in a wide range of markets and countries.

These businesses are typically owned and managed by multiple members of the same family, often cross-generationally. They emphasise long-term objectives so that the business may continue to be passed down from generation to generation, making succession planning for family-owned businesses a uniquely complex task.

What is succession planning?

Succession planning is the process of identifying and preparing suitable people to take over a business's leadership. This involves naming a successor (or successors) for a departing/retiring owner. It also potentially includes training, developing, and establishing a clear timeline for the transition.

Succession planning aims to ensure business continuity, boosting its chances for future success and maintaining the family legacy woven into the company.

What succession challenges might family-owned businesses face?

Succession planning for a family-owned business can bring a few unique challenges that may not be faced by companies with other ownership structures.

Factors such as emotional ties and family dynamics/politics may complicate decision-making. Meanwhile, legal and financial complexities add another layer of difficulty.

There can also be a gap in skills and leadership experience between the outgoing business owner and the next generation. This can make choosing the right successor (or successors) a difficult choice.

How to make a good family succession plan

When done right, succession planning offers numerous benefits. It ensures continuity and stability, preserving the family legacy and the business' reputation. Here are some tips to get started; however, this list is not exhaustive, and they may not apply to every business.

Understanding and assessing your business structure

Ensuring your current business structure is optimal before any transition occurs is key to any succession plan. This includes reviewing the organisation hierarchy and the effectiveness of the current management team.

Carefully reviewing each element of the business can help you identify and plug skill gaps which you as the business owner currently fill before a transaction to ensure that the business continues successfully post-transaction.

Identifying potential successors

This can be complicated for family-owned businesses, where an internal successor may have been presumed, it requires careful evaluation of their interests and capabilities to ensure no presumed successors are left unhappy or in the dark by a potentially different successor.

Development and training

Successors must have appropriate skills and knowledge to take the business forward, many potential successors can be exceptional in one aspect of the business but weaker in areas they may not have dealt with directly before (e.g. strategy or finance), so it is recommended that you invest (time and/or money) in formal training programs to prepare potential successors for their future role.

Establishing a timeline

Having a clear, realistic timeline in place for the transition is very important. Whether you opt for a phased approach or an immediate transfer of control and responsibility will depend upon your goals and circumstances, but it is essential to set these plans early, even if they are adjusted later to ensure all parties remain focused on the end objective – succession.

Legal, tax and financial preparations

A lot of documentation is involved in a succession plan, and everything must be correct and kept up to date. A qualified tax adviser can help you understand the tax implications of your succession plan and offer strategies to minimize your tax liabilities.

Additionally, it is also important to ensure that all pre-existing agreements between the current shareholders are up to date and as expected – the last thing any owner of a business wants is for the process to be disrupted by an unexpected legal complexity.

Finally, in the run up to a transaction, it is important to ensure that all your financial information is up to a professional standard, especially when potentially seeking external funding for a transaction – without up to date and accurate financial information, this can pose challenges later into the process when trying to agree and structure a deal.

Communicating clearly and effectively

Open, transparent, and effective communication is essential for a successful leadership transition. This means involving family members and other key stakeholders in the process early.

It also means communicating plans (when the time is ‘right’ for your business/employees) with your staff to reduce anxiety and uncertainty about their positions. Corporate change can be a worrying time for staff, and effective communication can mitigate those worries.

How professional advisers can help

Succession planning involves potentially complex legal, financial, tax and governance issues - Mistakes can be extremely costly and difficult to resolve. It is, therefore, very important to seek qualified advice in each of these areas once you have decided you would like to begin succession planning and ultimately leave your business in the future to ensure a smooth and successful transition to new business ownership.

At Shorts, we can help structure the ownership change, provide tax advice, and get your financial information in order. We can also recommend solicitors and assist with all legal paperwork and potential complexities.

Succession planning FAQs

When should succession planning start for family-owned businesses?

It is never too early to start succession planning. Ideally, businesses should begin the process several years before the anticipated transaction to allow ample time for preparation and training (if required).

How can I resolve personal conflicts during the succession process?

Running a business with family can create an extra layer of potential conflicts. Open, honest communication involving a neutral third-party professional advisor can help to mediate conflicts and ensure a fair and transparent process.

What taxes will I need to consider?

Tax implications are not static for every business transaction, but the most typical considerations for family-owned businesses include inheritance tax (IHT), capital gains tax (CGT), and business asset disposal relief. Consulting with a qualified tax adviser can help you manage these obligations tax-efficiently.

Can I choose a non-family member to succeed in my business?

Yes, non-family members can take over the ownership of a family-owned business and be effective successors. External individuals will often bring professional management skills and fresh perspectives or approaches to benefit the company.