Succession, the next gen, and the retirement of the founder – what matters

For a family business owner, transferring some or all of the business to the next generation is a “life event” and there are a number of matters that should be considered. Here are some matters we consider with our clients.

Proactive planning should mitigate the potential risks and instability arising from succession.  Such planning is an investment that protects the business and family against the uncertainties and unplanned costs of being forced to react to a situation, and, at worst, a scenario where the business/board could be paralysed.   

Where key shareholders and managers are senior in years, immediate consideration must be given to reviewing testamentary arrangements and addressing incapacity risks

If succession planning is tackled early on, at least there should be time to break down a seemingly overwhelming and/or unwieldy set of challenges, choices and competing influences, by addressing elements at smaller/short-term and larger/long-term scales.  Bespoke advice will identify priorities and easy wins, and provide a framework and time-line to tackle complex/sensitive issues.  

Divesting ownership of the business can mean giving up a life’s work, a valuable asset and dividends.  It can also mean relinquishing involvement in control or management since a shareholder may have the ability to influence the board’s composition.  An owner may be active in the business and be remunerated.  These different elements can be approached differently. 

At one extreme, an owner could leave all changes until his death.  But, that still requires careful planning (preferably with the family) and laying the groundwork well beforehand.  

The owner will not see the outcome and well-engineered plans still risk being out-of-date by the time of the event (stressing the need for flexibility in any such plan).  Where key shareholders and managers are senior in years, immediate consideration must be given to reviewing testamentary arrangements and addressing incapacity risks. It is often these incapacity risks that are harder to deal with in the short-to-medium term, especially if any loss of capacity is a drawn-out and not very clear cut affair. 

However, frequently owners’ plans are implemented as a continuum.  Here, an initial framework with long-term aims would be the starting point, which is revisited regularly to align it to family and business circumstances and the fiscal regime.  This should enable the planning to employ differing levels of sophistication as and when appropriate.  

For owners who worry about transferring ownership or control too soon, there are tools which include checks and balances that can be tailored to the particular circumstances.  Trusts remain a key tool here.    

An owner who is giving up a dividend stream will need comfort that his day-to-day living will not be compromised.  Understanding his budget can help ensure that loss of a dividend stream will be properly managed. 

An owner will need advice on tax and cost efficiencies on disposal of his interest, for example, to maximise inheritance tax and capital gains tax reliefs.  The mechanism and form of consideration should factor in what is appropriate to the transferor and/or transferee.     

In practice, we advocate bringing all relevant and concerned individuals together early on to “air” views on business succession, because devising a succession plan is challenging.   There is more than one tool to formalise the outcome, for example, shareholders’ agreement and different share classes, and/or a family constitution which may go further than simply dealing with the business.  

There is no silver bullet, but early investment in proper advice should bring comfort that the family and business is properly prepared.

Natasha Oakshett is a partner in the private client and tax team at Withers