According to Deloitte whilst 86% of leaders believe leadership succession planning is of utmost importance, only 14% think their organisation does it well. So why does succession go badly for so many companies, and what should they be doing instead?

Succession planning is crucial for business owners who need to decide not only who will inherit their business but also who will manage it in the future. This planning becomes especially important for businesses that have grown significantly and employ many people, representing a significant legacy for the owner.

There are three key areas to focus on when succession planning:

1. Who Gets the Value and Who Manages the Business:  The business owner must decide who will benefit financially from the business and who will be responsible for its day-to-day operations. These roles may not necessarily be filled by the same person or group.
2. Assessing Family Members' Suitability:  When considering family members for senior roles, it’s important to objectively evaluate their capabilities. An independent advisory panel can help ensure decisions are made in the best interest of the business, free from familial bias.
3. Experience Outside the Family Business: Encouraging potential successors to gain experience outside the family business can provide valuable perspectives and reduce insularity.

Following on from this there are several practical foundations you can lay before the succession takes place to ensure the process goes as smoothly as possible…

Forming an Advisory Panel

An advisory panel consisting of internal and external members can provide objective guidance. This panel helps the business owner make informed decisions about succession, ensuring that choices are beneficial for the long-term health of the business.

Planning for Management Transition

It is essential for the business owner to be transparent about their succession plans with both family and the business advisory board. This transparency helps prevent confusion and conflict after the owner steps down.

Creating a Family Constitution

A family constitution can help manage expectations and responsibilities within the family business. Family members may not always agree on how the business should be run and having a written set of guidelines can assist in navigating through such disagreements.

Whilst this will be tailored to the characteristics and needs of the business, typically such a document would address matters such as:

- Ownership and policy setting

- Management roles

- Handling family members' withdrawal from ownership

- Remuneration policies

- Dividend distribution policy

- Dispute resolution mechanisms

- Conditions for selling the business

It is also important to consider whether it is the right time to go ahead with the succession, both from a personal and practical point of view.

Timing of Succession Planning

The timing of succession depends on the owner's readiness to step aside. It is important to start planning well in advance to allow for a smooth transition, whether through passing the business to the next generation or selling it to an external party.

Financial Considerations

Owners must consider the financial implications of their decisions, such as the impact on inheritance tax (IHT) and ensuring financial independence during retirement. A well-funded pension plan and independent wealth can protect the owner and their spouse.

Finally, it is important to ensure that the business is passed onto the successor smoothly when they and the wider business are ready.

Options for Transferring Ownership

1. Direct Shareholding: Shares can be directly transferred to family members, clearly defining their entitlements.
2. Trust Fund:  Setting up a trust fund to hold the shareholding can be an alternative to direct ownership, potentially offering advantages in terms of retaining control.
3. Issuing New Shares: Shares with differing rights can be created to allow the individual shareholders to participate in varying degrees.

In each instance, questions of control and taxation will be relevant.

Interim Management Solutions

If the preferred successor is not ready, an interim external manager can run the business while the successor gains the necessary experience. This approach must be handled sensitively to ensure a smooth eventual transition.

Personal Decision-Making

Ultimately, the decision of who will inherit and manage the business should align with the owner’s vision for the future of the business and their personal values. Each business owner's situation is unique, requiring tailored solutions to address the specific dynamics of their family and business.

Conclusion

Succession planning is a complex but essential process for business owners. It involves not only deciding who will inherit and manage the business but also ensuring the business's future sustainability and growth. By forming an advisory panel, creating a family constitution, and planning financial independence, business owners can navigate the challenges of succession and secure their legacy.

Stuart Ritchie is an expert tax advisor with over 30 years of experience in the field who founded his own accountancy firm Ritchie Phillips LLP in 2003.

Stuart's new book, Who Will Get My Money When I Die?, launches on July the 2nd 2024, unpacking the seemingly complex world of wills and Inheritance Tax, and equipping readers with the knowledge to plan their future with confidence.