- Financial planning
- 5 minute read
Your business can be your most valuable asset, often representing a lifetime of hard work. Whether you want to pass on your business to the next generation of your family when you retire, or sell it to an external buyer, it’s essential to put a succession plan in place.
In this article, we look at the basics of business succession planning. We also highlight some of the more common ways of passing on business assets.
What is succession planning?
Succession planning is the process of identifying the future leaders of your business – those who will take over when you step down. The aim is to create a clear, defined vision of the future that ensures a smooth transition between business leaders, both for the business and for stakeholders. Done properly, succession planning enables an organisation to continue running seamlessly after its most important people move on to new opportunities, retire, or pass away.
It’s important to understand that a succession plan shouldn’t only be about the future of your business. It should also consider your plans for the future and your financial position. It’s also important to understand that succession planning is not just a one-time event. Plans should be continually re-evaluated and potentially updated each year, or as changes in the company dictate.
The benefits of succession planning
Putting a succession plan in place has many benefits, no matter the size of your business or your plans for the future. For example, a succession plan:
- Enables you to put an appropriate exit strategy in place, and plan ahead for the future with confidence.
- Helps ensure a smooth transition between company owners or leaders.
- Helps ensure that the legacy of the business continues when leadership is passed on.
- Provides protection in the event of an unexpected illness or absence, by ensuring that someone is ready to take over in the short term.
- Provides a sense of security for employees because they know there is a robust plan for the future.
- Helps business owners create more financial security.
Succession planning: how to pass on business assets
There are a number of ways business owners can pass on their business assets. Below, we look at three of the more common ways to transfer a business.
1. Passing on the business to a family member
Many family-owned businesses like to pass on ownership to the next generation. This can be an effective way to keep wealth in the family.
With this approach to succession planning, there are a number of issues to consider. Families must determine who will take over, what the transfer agreement covers, and how the company will be run after the transfer. There are also plenty of tax issues to consider.
To support the succession process, companies should consider engaging the services of a business adviser. An adviser will be able to help them work through potentially emotional decisions, cover all the financial considerations, and prepare the necessary documentation to complete the transfer.
It’s worth noting that family transactions are not a ‘quick-fix’ solution. They can take years of preparation. Ideally, successors should be employed within the company for at least 10 years before taking over, to ensure that they are fully equipped to run the business.
2. Management buyout
Another approach to selling a business is a management buyout (MBO). This is a form of acquisition in which a company's existing managers pool resources and acquire a large part, or all, of the company. Funding usually comes from a mix of personal resources, private equity finance, and seller-financing. MBOs can appeal to managers because of the greater potential rewards from being owners of the business rather than employees.
Management buyouts have a number of advantages. One key advantage is that disruption to the business is usually minimised. The buyers have an existing knowledge of company operations and employees feel more secure when managers they know take over. Client relationships are also easier to maintain.
3. Selling the business externally
A third option is selling the business to an external buyer. This approach can potentially have financial advantages. If you can find a buyer with a strategic reason to buy your business, you may be able to negotiate a higher price. As such, this strategy can be a good way to raise extra funds for retirement or new projects.
On the downside, this approach requires significant advance planning. Whether selling to an individual or another company, it’s vital to find a buyer that has the right combination of skills, experience, and commitment. It can take time to find the right buyer. Here, the services of a business adviser can be of great help. An adviser will be able to help source buyers and also provide advice in relation to your business’s valuation.
How to construct a succession plan
Because every business is unique, there is no universal, one-size-fits-all approach to succession planning. For some business owners, it may involve making plans to pass on the company to the next generation of the family. For others, it may involve making arrangements to find an external buyer. So, every succession plan will look different. However, there are a few basic steps that should be part of every plan. These include:
- Establishing your goals and objectives: a succession plan should start with your goals and objectives. Consider both business objectives and personal objectives. As well as articulating collective visions and objectives for the business, focus on your own retirement or next chapter in your life. This will make it easier for you to let go and for your successor to fully take over.
- Agreeing a timeline: the next step is to define when the succession should take place. It may be on a predetermined date or alternatively, in the event of death or illness. Determine how and when control of the company will be transferred to your successor.
- Communicating with employees and customers: finally, communicate the succession plan to all stakeholders including management, employees, and customers. Change brings about a feeling of uneasiness for many people and communication can help reduce this. It’s one of the most important elements of a succession plan and helps to ensure a smooth transition between leaders.
Start planning early
Succession planning is an integral part of running a business. It should be treated with the same importance as strategic business planning. Planning should start early, and also be reviewed regularly to ensure maximum success. Don’t hesitate to enlist the services of a financial adviser. An adviser will save you time, bring objectivity to the process, and help you consider issues around taxes and estate planning.
To find out more about how Close Brothers can help you with succession planning, contact us by clicking below.
Capital at risk.