Partner Ross Brown outlines the importance of business succession planning and provides five general tips on how to approach your exit plan.
Planning for succession, when you have not just family but business interests to consider, is never an easy thing to think about. You need to consider a number of different issues and you may need to come to terms with some difficult realities. Planning for what happens on your death is a morbid but essential task that we all need to deal with to give certainty to those left behind.
If you already have a Will in place then you have taken the first step in your succession plan. But this is only part of the bigger picture. Every business owner needs to have an exit plan one way or another and it might come into play before you die. Either way, this process inevitably involves detailed planning and can never start too early.
Here are some general tips on how to approach your exit plan.
1. Face up to the realities
You need to accept that you will not always be around to run the business. Contrary to popular belief, you are not going to live forever! If you want the business to keep going then you need to think about how to achieve this.
It is important to go into the process with your eyes wide open. Succession planning is never easy and it involves you making some difficult decisions which may not please everyone. However, if you are willing to face up to the potential challenges then these can be addressed as part of the process and lead to the best outcome possible.
You do not want to be making these decisions at a time of crisis. This could lead to hasty decision making which could cause serious difficulties for your family and the business. It is important to achieve as smooth a transition as possible.
2. Set your aims and objectives at the outset
Think about whether you want to sell the business or pass it onto the next generation. If you are selling, you need to consider who is going to buy the business and think about what they are actually buying. Are there assets to sell or are you simply selling the name?
If you are passing the business on, you need to think about timings and how this is going to work going forward. Who is going to be involved in the decision-making process? Is there to be a distinction between who runs the business day-to-day and who is entitled to the income produced?
3. The family
If you are looking to pass the business onto the next generation, then don’t go into the process with rose-tinted glasses about the people and personalities involved. Think about whether you are prepared to hand over the reins to the next generation and how best to achieve this. Remember that there is a distinction between running the business on a daily basis and simply receiving a share of the profits.
If there is to be a generational shift, then everyone needs to understand their new roles within the business. Part of the process is the education of these involved and this is particularly important for those who are not actively involved in the business.
4. And what about you?
You need to think about what you want out of the business when you exit to make sure that you have something to live on during your retirement. If you are simply gifting your interest to the next generation then this is not likely to generate a capital sum. You may wish to think about retaining some sort of income from the business or include earn out provisions as part of the exit arrangement.
The tax implications are critical to your business exit plan. Although most schemes can be structured in a broadly tax efficient way, this does need some planning. It is important to be aware of the potential tax consequences, particularly if you are passing your interest on to the next generation, and appropriate professional advice should be obtained at the earliest opportunity.