Illistration concept of succession planning

There has undoubtedly been a refocus on business succession planning during the pandemic, possibly driven by a desire to find an element of stability in these incredibly unstable times. So, what do family business owners need to be aware of when starting the succession planning process?

Succession planning for family business owners is important for two core reasons.

The first is to make sure that the business is transferred effectively to the “next generation” (if desired), either during lifetime or on death, to ensure its future success. Family businesses are often built on years of history and tradition, and owners are often charged with ensuring that those virtues continue to be embraced when the business is in the hands of the next generation.

The second is to ensure that the assets are structured in an efficient manner to help minimise tax charges when they are transferred. In the absence of tax efficient structuring, difficult decisions may have to be made in order to pay unforeseen tax liabilities including, in a worst-case scenario, the sale of the business or part of it.

The global health crisis has led people to think about what the future of their business might look like if they are no longer around and how they might go about passing their assets to the next generation. Minds have been focused. In recent years, succession planning has risen to the top of the agenda, with business owners recognising its strategic importance.

A huge financial deficit has also been created by the pandemic, which the government will ultimately have to find ways of making up, now and into the future. Potential tax reforms remain on the wider radar of many. Capital Gains Tax and Inheritance Tax have long been targets for reform and, whilst the dust appears to have settled on the most recent government reviews led by the OTS, the long-term future of capital taxes remains uncertain.

Therefore, people are currently focused on building on the existing (relative) certainty. For example, Business Property Relief remains extremely valuable for business owners, enabling a business which is wholly or mainly trading to qualify for 100% relief from Inheritance Tax if owned for two years. Future reform cannot be ruled out and so, where circumstances permit, business owners are willing to accelerate their succession plans to make the most of what many see as a relatively favourable existing tax regime.

However, tax is only part of the puzzle and should not be the only or main driver to any succession plan.

For those just starting the succession planning process, possibly the main consideration is how to obtain agreement on key issues which frame the family business’ direction and ultimate succession. Often, this will involve engaging with and preparing the next generation.

For business owners, preparing a “blueprint” for the future operation of the business can often be a long and winding road. Initially, the questions can be seemingly endless. How can the family protect against the fragmentation of the business as it passes down a generation? What about managerial succession? Should the core values of the business be maintained by the next generation? Should the next generation work within a framework to ensure that the overall structure, ethos and direction of the business is preserved? Is transferring the business to the next generation even sustainable? Keeping the family legacy alive is a dream many have, but it is not always viable.

There are no right or wrong answers and every business will be different.

Open communication is absolutely key to formulating a successful succession plan. A family business is as personal as it is professional, meaning a careful balancing act is required between organisational and emotional needs.

By putting all cards on the table early on, the key players – the existing owners and the next generation – can see where they stand and offer their thoughts. It is not always easy to achieve, with many owners either too busy or too involved to fully “let go of the reins”, and some are perhaps unwilling to start having those difficult conversations about what the future of the business might look like when they are no longer around.

However, a failure to plan for the future can cause significant issues. Not everyone has the desire or the means to run a business, and if the next generation are ill prepared, it could lead to the business being sold as soon as it is inherited, a result that the owners may not have envisaged or wanted. 

Therefore, putting together a succession “blueprint” can help provide some all-important stability for business owners as they navigate an almost perfect storm of global uncertainty.  

 

Iwan Williams, partner and business succession planning specialist at law firm, Shakespeare Martineau