More than half of Uk business are family owned and many of those are small businesses. Less than half of these family owned or small businesses have a written and up-to-date succession plan in place.
Normally business owners and managers focus on short or medium term goals which tend to relate to financial performance and growth, staffing strategies and business development. Thinking about how the business may transfer both in terms of ownership and management in the future, is not usually incorporated into the strategic business plan.
But succession planning should be documented in every business plan and then reviewed regularly, at least once every year.
It can give business owners and managers confidence and reassurance. When the time comes to implement the succession plan, or if there is an unexpected event which accelerates the implementation of the succession plan, the business is best placed to succeed and to achieve its specific goals and objectives.
Here are some important issues for businesses in the context of succession planning:
• Identifying and planning for the next business owner(s) and manager(s)
• Getting the tax right
• Preparing and reviewing ‘emergency’ legal documents
Identifying and planning
For many family businesses this may be obvious. Children may be ideally placed to become the next business owner and perhaps also manager. For other small businesses, the next business owner may be a third party as a result of a sale, or managers as a result of a management buy-out.
Where particular individuals are identified to succeed, it is essential to consider their future role in the business, and whether they possess the necessary skills and expertise, the maturity and, perhaps most importantly, the drive and commitment to fulfil that role. A common mistake is to assume that they will fulfil exactly the same role as their predecessor given that every individual has different strengths and weaknesses.
New business owners are not always the best new managers. They may need support, experience and/or training. They may also need a strong and established management team consisting of family and non-family members. Involving new owners at an early stage in business planning, seeking their opinion and appreciating their input may ensure that they gain a knowledge and understanding of the business and also are encouraged and given confidence.
A timetable to implement the succession plan should be agreed, documented and reviewed. The transfer could take effect over a period of months or years which has the benefits of continuity and testing the new owners’ readiness to take responsibility.
Getting the tax right
There are usually UK tax implications, particularly capital gains tax (CGT) and inheritance tax (IHT) implications when the ownership of a business is transferred. It is always advisable to take professional advice early and more than two years before any transfer to minimise the tax payable.
A gift or sale of a business during the owner’s lifetime will trigger a potential CGT liability. In certain circumstances it is possible to ‘holdover’ (defer) the liability at that time by claiming holdover relief. In other cases it may be a good idea to claim entrepreneurs’ relief and pay CGT at the lower rate of 10%.
A gift or sale for less than open market value will also trigger a potential IHT liability. Business property relief (BPR) is a valuable relief which, if claimed, could avoid such an IHT liability provided that the business is a trading company, and the owner making the gift or sale has been the owner for at least two years. Where BPR is not available the owner may make a gift which is potentially subject to IHT at a rate of 40% if they die within seven years.
By planning early and getting the tax right, with the help of expert advice, business owners can ensure that business assets transfer with the minimum of tax liabilities.
Preparing and reviewing ‘emergency’ legal documents
Sadly no one is invincible. Death is inevitable and mental incapacity is on the rise. A business owner who does not plan for the possibility of these events risks the business failing, or ownership or control falling into the hands of an unintended individual who may be reluctant, or not capable, of managing the business.
The following are essential legal documents which every business owner should sign and keep up-to-date:
1. A valid Will. Careful planning in a Will can specify that ownership and control passes to named individuals or, where flexibility and protection is important, the Will can create a bespoke trust to hold the business assets.
Creating a trust in a Will where the business owner has a surviving spouse or civil partner (spouse) can also be good tax planning, as BPR for IHT purposes may be claimed and the spouse can still benefit from the trust assets during their lifetime. IHT at a rate of 40% is avoided on the value of the business assets even if they no longer qualify for BPR at the date of the spouse’s death.
2. A registered property and financial affairs Lasting Power of Attorney (LPA). Without such an LPA, the business owner’s assets will be frozen in the event of mental incapacity until such time as the Court of Protection appoints a Deputy which can take up to six months.
For a business owner it may be advisable to have two financial LPAs, one for their business assets which appoints managers or co-owners of the business, and one for their non-business assets which appoints family members.
3. A legal agreement which contains appropriate succession provisions. For instance, in the event of the death of a business owner the surviving owners will wish to retain control, usually by purchasing the deceased owner’s share of the business. Commonly an option agreement combined with a life policy is signed at an early stage by co-owners of a business, to ensure that the surviving owners have the means (the proceeds of the life policy which should be free of IHT if written into trust) and capability (by exercising the option within a specific time period) to continue the business. In other cases the shareholders’ agreement or partnership agreement will need careful consideration and drafting.
Bespoke and early succession planning by business owners and managers will ensure that the business is prepared, and capable of tackling both an intended transfer of the business and an unexpected transfer, as a consequence of one of life’s events.