Many see handing over the family business as simply passing the baton over to the next generation and retiring into the sunset. In fact, there are many stages to an effective succession plan and will often take a number of years. It is advisable that all business owners consider their exit strategy as early as possible and ask themselves:
- How will you exit?
- When do you want to exit?
- What are your expectations on an exit?
- How will you achieve this?
Often an exit from a business will take place by way of a sale either to a third party or to existing management. The 'family' aspect of a business adds another element to the management and ownership dynamic and there are a number of additional considerations when dealing with the 'family business'.
- Are the next generation the right people to take over the business?
- Do you have buy-in from the next generation to take over?
- How will you manage the transition from one generation to the next?
- Have you taken appropriate professional advice (including legal and tax) on the best way to implement this?
- Will an exit to family give you the retirement pot you need?
The Next Generation?
Succession planning can often be a difficult concept for some owners to face up to which can lead to the process either being started too late or not at all, preventing owners from realising the full benefits from an effective and efficient handover. Starting the process early is therefore important.
It is obviously important that there is buy-in from the next generation to want to take over the business but equally, are they right for the business? Motivation can sometimes be different in a family scenario as there can be a degree of expectation or entitlement from a future generation rather than one of opportunity. Addressing this early on can help manage expectations including around price which can often be a difficult point for family members to discuss!
It is unlikely that you will simply step away from the business and hand the reins over without a transition period. Involving the next generation in the business from an early stage in both the management and decision making processes will provide for a smoother transition on the changing of key management personnel. Careful consideration should be given here as there can often be differing opinions on how the business should be operated and having agreements or rules to govern the decision making process is advised.
It is also common to have an interim stage of ownership between the generations. This helps to engage the next generation in the business, incentivise them from an early stage and manage the expectations of the future owners. It will also enable you to ensure that all profits are being extracted as efficiently as possible. A company restructuring exercise is often undertaken to achieve this.
It is never too early to involve professional advisors in the process and this is the best way of maximising your options and value.
There can be significant tax considerations to take into account and timely planning is essential to make the most of what is available. It is also important to ensure that the legal governance and corporate structure is put in place and experienced legal advisors will be able to advise on structuring and preparing the transition and ultimate handover.
Originally published 2 December 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.