They say the best time to plant a tree is 20 years ago, and the second best time is today. That’s why we save, invest, take out insurance, and eventually life insurance too, so we can protect our family if the worst happens to us.
Most people understand this and act early, but one type of planning often gets overlooked and undervalued among the heads of family business – how the business will run when they’re gone due to retirement, illness or untimely death.
A family business is a special thing, bound together by, well, family. There’s a special attachment there, and you’d want to see your family’s stamp on the world endure.
But only 42% of UK family-run SMEs have a succession plan in place, which contributes significantly to why just 27% survive the transition to the second generation and a shocking 10% to the third.
What’s worse is 57% of these businesses would have to close within a year and 25% immediately if the owner suddenly died or developed a critical illness.
So, this is an extra area you want to ensure is covered, but there are good ways and bad ways to plan a succession that you need to know.
It’s just as important to plan before time for your retirement as it is to protect against unseen, unfortunate events. A good succession is a multi-stage process spanning years, not a single, ceremonious event where the baton is passed on.
They come with lots of difficult questions and decisions but by having succession structures already in place, like conflict resolution mechanisms, board membership and management plans, you can avoid a messy, heated transition, because everyone has already agreed to their roles well in advance.
Early planning also means you can decide how you’re going to approach the transition of management and ownership. Remember: management and ownership succession are not the same and don’t necessarily have to happen at the same time.
So are you going to keep the business in the family with external management, or is someone in your family going to own and manage it?
You might want to stagger each succession, giving your prospective successor a director’s role a year or so before you relinquish management of the business. That way, you can offer advice when asked while giving your successor breathing space, before handing over the keys entirely to them.
Engaging the next generation
Planning early, even when your children are young, lends itself to growing them into the next leaders of your business, so if you envision them taking it over, you’ll want to instil them with pride and respect for the family name and care over their finances from an early age.
You could get them working in the business during the summer, send them to university for a business degree or help them find work in a related field to get some outside work experience.
You might have doubts over whether your children will actually want a career in the family business and will want to work somewhere else, however, but this doesn’t mean that they’ll never come to the business.
Sometimes, it’s actually better for your successor to get new experience, skills, perspectives from a business outside your own to diversify the family business and keep driving its success.
Of course, you don’t need me to tell you that forcing the family business onto your child when they don’t want it isn’t fair. Not only would it be bad for them but also for the business if it had a leader whose heart wasn’t in it.
Consider non-family employees
Considering the impact of your succession on the rest of your workforce matters just as much as the impact your decision has on the family within the business.
Non-family employees might not be thrilled to see that your successor is someone who only got where they did through their familial connections and not their own achievements, so transparency is key to ease concerns about your successor’s qualifications.
If you genuinely are struggling to match the requirements of business management to your children’s’ CVs, you might consider hiring outside of the business for that much-needed talent. It happens and sometimes needs to for the sake of the business.
Outside managers will have a wealth of knowledge of other markets and business structures, and could bring a new dynamic to the businesses, so you shouldn’t necessarily think of it as a backup plan for you.
Picking someone from outside the business over a member of your own family could cause a rift, but only if you fail to make it clear to your children what you qualifications, experience and work ethic you expect from them well in advance.
You’ll want to ensure you’re prepared to pay your dues in tax, especially inheritance tax, a 40% tax on someone’s estate, including their business, that has to be paid upon their death.
While gifting or selling your business, any assets or shares you give to your spouse won’t incur inheritance tax charges as long as you’re not separated and your spouse doesn’t intend to sell the assets on. This doesn’t apply to other relatives, who may have to pay a tax charge.
For tax purposes, if you sell your business, assets or shares for a lower price than they’re actually worth to your children, the difference between the sale and true value counts as a gift and is also liable to tax.
There is business property relief that can reduce the amount of inheritance tax due, however, to give 50% or 100% relief of some an estate’s business assets that can be passed on while the owner is still alive, or in a will.
Tax planning for the succession of your business is a complex issue and should be done with an advisor to help you set out your tax plan. It is, after all, just as important a part of the process as choosing the right successor.
Talk to us about your business succession planning and how we can help you build the most tax efficient plan possible.