Family businesses often represent years of hard work and a legacy that many owners want to protect for the next generation.
However, not every family business survives after ownership is passed on and this can often be due to poor succession planning.
Family businesses may delay succession planning if passing on ownership seems far away or if uncomfortable conversations must be had. However, leaving it too late could be a costly mistake.
Jonathan Hol, an Associate in our Company Commercial Department, explains the importance of succession planning in a corporate or business entity.
What is succession planning?
A succession plan sets out how ownership and control of the business will pass on from one generation to the next or to new owners when an individual steps back.
A clear succession plan should consider ownership, management, timing and address the legal, tax and financial implications of passing on ownership. More often than not, private client as well as accountancy advice is required in most instances.
Family business succession planning often overlaps with personal estate planning and making sure these decisions are clearly documented can help your business’s continuity.
Why is succession planning needed?
Without a clear succession plan, disputes between family members can arise over ownership or leadership roles.
Some family members may wish to be involved in day-to-day management, while others may prefer an ownership role, a sale of the family business or merely an exit altogether.
Clear ownership structures that are supported by shareholders or partnership agreements can set out expectations and prevent future conflict.
It can even help preserve family relationships by setting expectations early.
Poor planning can also lead to unexpected tax liabilities and could even reduce the value of the business when it is passed on to the next generation.
Employees and customers may lose confidence if there is uncertainty about who is in control.
Business owners should consider succession planning if they wish to retain control over how and when the transition happens.
How do you prepare a succession plan?
Succession planning should ideally begin at least five years before your intended exit.
If your business is owned by multiple family members or you wish to pass on your ownership to a family member, you should consider reviewing shareholder agreements to set out how shares can be transferred and the responsibilities of each shareholder.
Wills should be updated alongside any corporate succession decisions, as an outdated Will can result in the ownership of business interests being handed over in a way you did not intend it to.
How can we support your succession planning?
Succession planning is not about preparing for retirement but protecting the future of your business.
Our professional team can help assess your current arrangements, draft or update shareholder agreements and advise on the most appropriate structure for transferring ownership.
We want to help secure the future of the business you have built and provide reassurance that your plans will be enforceable once you step back.
For more advice or support from our specialist family business team, please contact us.
