Business succession planning – what you need to consider

For any entrepreneur, business succession planning is a critical process for ensuring the smooth transition of a business to new ownership or leadership. In this blog, we outline the key factors business owners should consider as part of their business succession planning activities.

Clarifying your personal goals

• Be clear on your plan: Are you looking to retire or sell the business and do something else? You need to be clear on your objectives before you can get others on board.
• Full or semi-retirement: If semi-retirement is your preferred route, what role do you envisage carrying out in the business, how many days a week do you want to work, and for how many years?

Identifying successors

• Internal vs external candidates: Decide whether the successor will come from within the business (e.g. family members, key employees) or externally (e.g. a buyer, new partner).
• Skills and leadership: Assess the potential successor's skills, leadership qualities, and experience to ensure they can maintain the business's long-term vision and profitability.
• Family dynamics: For family-owned businesses, ensure clear communication and manage expectations among family members to avoid conflicts.

Determining the business valuation

• Conducting a comprehensive valuation: Use a professional adviser, such as an accountant, to assess the business's financial records, assets, liabilities and cash flow, as well as researching market trends to provide an accurate valuation.
• Providing realistic projections: Put together realistic financial forecasts to avoid undervaluing or overvaluing the business, which could lead to financial loss or difficulty finding a successor.

Structuring the sale

• Asset vs share sale: Decide whether to sell the business as an asset or share sale. This may depend on the tax implications, the structure of the business, and the needs of both the seller and buyer.

• Employee buyouts and management succession: In cases where employees or managers are taking over, aim to structure the buyout in a financially viable way for both parties. This could involve staggered payments, earn-outs, or management buy-in strategies that preserve cash flow while allowing the buyer to take control.

Legal structure and ownership

• Ownership transfer: Review the business's legal structure (e.g. sole trader, partnership, or limited company) and determine how ownership can be transferred smoothly.
• Shareholder agreements: Ensure that agreements between current shareholders and potential successors are clear, legally binding, and reviewed regularly to avoid disputes.

Tax considerations

• Capital Gains Tax (CGT): Consider the CGT implications when transferring or selling shares or assets. Entrepreneurs' Relief (now Business Asset Disposal Relief) may reduce the tax liability, but eligibility needs to be confirmed.
• Inheritance Tax (IHT): Plan for potential IHT liabilities if the business will be passed on to heirs. Business Relief and Agricultural Property Relief can reduce or eliminate IHT on qualifying businesses.
• VAT, stamp duty, and other taxes: Speak to your accountant to ensure your business succession plan accounts for all other relevant taxes, such as VAT on asset sales and stamp duty on share transfers, helping minimise unnecessary tax burdens.

Funding the succession

• Buyout funding: If key employees or family members are buying the business, how will they finance the acquisition? Consider financing options, such as management buyout loans.
• Life insurance policies: For owners who are key figures in the business, life insurance policies can provide funds to ensure smooth continuation in the event of sudden death.

Business continuity and risk management

• Key person insurance: Take out key person insurance to protect the business from financial losses if a vital leader or manager passes away unexpectedly.
• Crisis management plans: Prepare for scenarios where the transition does not go smoothly or an unexpected event disrupts the succession plan.
• Due diligence: Ensure that all financial records are in order and that potential buyers have access to accurate information. This reduces the risk of disputes and ensures a transparent transaction.

Exit strategy

• Selling the business: If the succession involves selling the business, prepare the business for sale by optimising financial records, reducing operational inefficiencies, and boosting profitability.
• Timing: Where possible, plan the timing of the sale or transfer to coincide with favourable market conditions, both for the business and the owner's personal situation (e.g. retirement).

Training and mentorship

• Transition period: Plan a handover period where the outgoing leader can mentor the incoming successor, providing guidance, knowledge transfer, and leadership development.
• Formal training: Where appropriate, consider investing in formal training or professional development to ensure the successor has the required skills to lead the business.

Regulatory and compliance issues

• Legal obligations: Ensure the succession plan complies with regulatory requirements such as company law, employment law, and contract obligations.
• Licensing and certification: If the business operates in a regulated sector, ensure that any necessary licenses or certifications can be transferred to the successor.

Employee and stakeholder engagement

• Employee retention: Engage with key employees to ensure they are motivated to stay during and after the transition. Their loyalty can be crucial for business continuity.
• Communication with stakeholders: Inform stakeholders, including clients, suppliers, and partners, of the transition plans to maintain trust and ensure smooth operations.

By considering the above factors, business owners can create a robust succession plan that minimises risks and maximises the likelihood of a successful and smooth transition.

Consulting professional advisers

For many people selling their business is a once in a lifetime activity, so getting the business succession planning right is likely to be key to their future.

DWilkinson&Company have extensive experience in helping local business owners prepare their businesses for sale and then work with them and the rest of the board to achieve a successful outcome.

We would be happy to have an informal chat with you about your business succession plans. If this is of interest to you, please contact us at 0113 320 0001 or email office@dwco.uk.