What is Succession Planning?
As owner/manager of a small business or farm, the likelihood is that 100% of your energies are focused on the demanding task of running the business. It can be difficult to stop for a moment and imagine your business 5, 10 or even 20 years from now. What do you see? What if you saw nothing at all? What if your hard-won reputation, brand and company had disappeared?
Unless you tackle the most complex question of all – finding someone to take over your own responsibilities – the future of your business could be in doubt.
That’s where Succession Planning comes into its own. In business, Succession Planning involves identifying and preparing suitable people to replace key members of the management team (especially yourself as business owner) as they move on. Large corporations and multinationals put a huge focus on Succession Planning, with top executives, HR staff and succession management specialists all playing a role in preparing the business for a change in key personnel. However, in smaller enterprises, owner/managers often do not recognise Succession as an issue and fail to make plans to hand over the reins. This can create difficulties for the owner, the staff, and the business as a whole.
The Family Business
Only 20% of non-farming family businesses are successfully passed on to the next generation.
The biggest pitfall for many owners is the failure to select and prepare a future leader to take over at the helm. Regardless of the size of the company, Succession plans need to be developed, and potential successors must be recognised and up-skilled. Developing a successor’s talent is a long-term investment, and this investment should be considered as early as possible, as progressing the potential successor’s education and work skills may take several years.
Time will also be required for the transfer of knowledge from the current business owner. Some 80% of small businesses are considerably reliant on the past proficiency and expertise of the business owner and their leadership skills, as well as the relationships they have built up over the years with suppliers, advisers and customers.
What is involved in a Succession Plan?
Succession Planning is a process, not a quick fix. Ideally, your long-term plan should encompass all aspects of the business. In the past, Succession Planning mainly focused on ensuring continuity in the key leadership positions, but nowadays it is important to consider the need for continuity throughout the entire business.
This ensures that employees are ready for new leadership roles as and when the need arises. It also develops a diverse workforce with qualified people in all positions within the business, today and in the future.
Key steps for transferring ownership of your business:
● Plan for your future financial security. Establish financial resources that are independent of your business e.g. pension, keyperson insurance etc.
● Make a Will. This will avoid a lot of expense, problems and difficulties for your family. It’s very important to formally lay out your plans for your estate. A tax-efficient Will should be structured with options, perhaps for the beneficiaries to disclaim assets, which can be put in trust for a period of time. This may enable the trustees to arrange the assets so that the beneficiaries can avail of tax reliefs such as Business Property Relief.
● Identify who will take over as the owner of the business and make sure they know about your plans.
● Prepare your successor. Transfer control, while ensuring the continued success of the business once you leave requires planning and preparation.
● Identify advisers. The process of formulating a viable Succession plan needs outside advice and consultation.
● Plan for your retirement unexpected.
Expect the Unexpected
In business, unexpected events can dramatically change the fortunes of a company. A wise business owner looks ahead and develops contingency plans to minimise the risks associated with unforeseen occurrences. Succession Planning is one way to help you and your business prepare for sudden, major change.
In the case of the unexpected death or disability of a key player, what is likely to happen to your business without a succession plan in place?
Succession planning is a process involving a number of key elements:
1. Designing a strategy to allow the owner to exit the business by extracting value in a tax-efficient manner, or to pass on the business to family members in a tax-efficient manner.
2. In the case of a planned exit, ensuring the handover to the new owner takes place with minimum disruption to the business.
3. In the case of the unexpected death or disability of the business owner, ensuring that suitable structures and plans are in place so the business can cope with the loss of a key executive.
Succession Planning should be considered by anyone in business (a self-employed person, a shareholder, or a partner) and the process should start right now, even if a transition, retirement or sale is not a current prospect.
Keep your eye on the “big picture”
When preparing a Succession plan, think about the impact the plan will have on your estate – in other words, how your assets will be passed on to family members during or after your lifetime. It is essential that you make a Will to deal with your estate upon death. In addition, review your affairs to ensure that:
● Assets pass in the most tax-efficient manner possible.
● All available tax reliefs are utilised.
● Tax charges, if they cannot be eliminated, are deferred where possible.
Tax and company law can change regularly, as can the economic climate. You should review your Succession Plan regularly to make sure it conforms to current legislation and meets your requirements – and revise it if necessary.
Morgan McManus Solicitors will form part of your team of advisers to formulate your Succession Plan and thereafter will implement that plan in partnership with you, as your trusted adviser.