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Law for Business

Knowhow - guidance - precedents

09 NOV 2012

The succession dilemma

Planning for succession is probably the toughest challenge that many family businesses ever face. It calls for courage to deal with any differences of opinion over which roles the next generation should take. Sometimes the problem is that, nobody in the next generation has the ability or desire to take up the reins.

However, avoiding this key issue is risky, for the simple reason that without a succession plan in place, the business is unlikely to survive the change of baton to the next generation.

The statistics bear this out, as many sources suggest that 60-70% of owner-manager businesses do not make it to the second generation. Clearly, this can be for a number of reasons, but, a reluctance on the part of the owner-manager to knuckle-down to preparing their succession plan is frequently a key cause. Our 2011 National Family Business Report shows that almost half of the survey respondents were not in a position to reveal even the most basic plan for their business, whether to sell, pass it to the family or management etc.

When should you start planning?

Typically, owner-managers are forced to confront succession planning as their own retirement approaches. However, many continue to evade the issue well beyond that point. Even Henry Ford held on to power well into his eighties and almost destroyed the car manufacturer in the process. The answer is that succession planning should start as soon as possible for the already well-established business and, ideally, it should involve all the family. The plan should reconcile the strategic possibilities for the business with the needs and aspirations of the family members.

A simple starting point is to hold a family meeting where each family member's ideas can be discussed openly. This helps to prevent unpleasant surprises cropping up further down the line. A lack of communication about what role each member plans or hopes to play in the future business is another common block to effective progress.

Pick your moment to start discussions sensibly. There is no point in scheduling meetings to discuss the future management of your business at the busiest time of the year. Highlight a time in the business calendar which is likely to work and invite everyone in the family, not just those who work in the business to attend.

Our experience of working with family businesses in our consultancy work tells us that the views of the family members who do not work in the business can prove as important and influential as those who do. This is because, it is impossible to take the family out of the family business. Owner-mangers who recognise this fundamental key to understanding the dynamics of a family business have a far greater chance of success than those who do not.

Seeking advice

Once you have outlined an idea of what you hope to achieve, your next step is to seek specialist advice. Solutions to ownership succession can include options such as a partial management buy-out, where the senior management team are given some of the equity in the business, but a proportion of the ownership is kept by the founder member, for the benefit of the next generation.

Planning for retirement and securing enough income for the owner-manager and their spouse or partner is another driving force for most owner-managers. Advisers can help meet these needs by reorganizing shareholdings between family members and/or by establishing family trusts and shareholder agreements.

It is also important to have a professionally drafted Will and to take advantage of any tax relief available, such as Business Property Relief for inheritance tax. It is often beneficial to set-up discretionary trusts to capture this hugely valuable tax relief for the benefit of the next generation and the business.

The key message to all owner managers is: to ensure success, start planning now rather than putting it off until it is too late, if you want to successfully pass the baton on to the next generation.

How do I take this further?

The specialist lawyers within our Family Business Team will be happy to tailor our advice to meet your individual needs. We can also offer consultancy advice on taking the first steps towards succession planning if you find this area a minefield as many of our clients do.

For further information, please contact Julia Hardy, Associate at Veale Wasbrough Vizards on 0117 314 5632 or at jhardy@vwv.co.uk.

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