Business succession planning is easy to put off; it’s an admission that one day somebody else will be in charge. Of course we all know this, but planning for different times can be among the least attractive things a business owner needs to do.
And, unlike other tasks such as VAT returns, nobody will make you do it or punish you if you don’t, yet it can be of great value to your family, your colleagues and your business if you do. This article highlights some of the issues to think about when you take the plunge and make a business succession plan.
What is a Business Succession Plan?
A Business Succession Plan (BSP) is a plan that achieves an orderly handover of the business on the owner’s retirement or death. Ideally it will enable you, in the most tax effective way, to:
• Decide and control how you leave the business
• Provide financially for your retirement and your family’s future
• Maintain the value and promote the longterm survival of your company
In fact, it consists of three plans: one for the owner, one for the family and one for the business, which all come together to form a BSP. It all starts with the owner’s plan, which is discussed in detail in Robert Knight’s article in last month’s issue of Platinum Business Magazine. As the owner, your big decision is whether to sell the business or pass it on to the next generation. But, even if your preference is to sell up when you retire, it’s best to have a plan in place to pass it on, just in case your sudden incapacity or death takes the decision out of your hands.
How you pass the business on will depend on your circumstances. For example, if your spouse is fully involved in operating the business and is in good health, your initial BSP might entail joint ownership of all the shares in your company plus a will leaving everything (private and business-related) to your spouse.
This is simple, and your Owner’s, Family and Company BSPs are identical at this point. But if your spouse has a separate career and no involvement in the business, their interests and how you will provide for them if you die first are different from the company’s interests, so each needs to be accounted for in your BSP.
Otherwise your sudden death could lead to your spouse having to cope with owning a business they don’t know how to run, on top of their grief at your death.
It is important that BSPs are easy to update as circumstances change, and as time goes on and you and your spouse start to think about retirement, your first BSP will need to change too. If you have an adult child actively involved in the business and suited to take over your central role, this is the time to put them into the BSP.
A way to start your BSP is to jot down the answers to these key questions:
1. Where are you now? – Do you have a spouse who is fully involved in operating the business and is in good health or a spouse who would be distressed at suddenly inheriting the whole company? Is one of your adult children involved in managing the business and a likely successor? Are there other children who are not involved but rely on dividend income? Do you have a business partner or key management team who could take over your role?
2. Where do you want to be eventually? – Do you see yourself enjoying a long retirement or staying in harness for a long while? Do you have a well-filled pension pot or will you need income from the
business into retirement? Do you want to retire with a bang or have a phased handover?
3. What position is the business in? – Are you the spider in the middle of the web who is the key point of contact for suppliers, customers and employees? Does your business rely on constant innovation and invention or could it follow a steady course with a reliable income stream? Thinking through these will give you a pattern for your BSP to follow.
Once you have the pattern of your BSP there is a set of tools that you and your advisers can apply.
1. Legal documents – The main tools are your company’s shares, articles of association and shareholders’ agreement, directors’ service agreements, and your will and lasting power of attorney discussed in Robert Knight’s article.
2. Tax planning – You and your tax adviser can look at the various capital gains tax and inheritance tax reliefs that are available and how to transfer shares in the most tax-effective way.
3. Management planning – This includes a strategic plan for the business, identifying key managers who can take it forward and an orderly process for handing over key information and control. It may include incentivising managers from outside the family by transferring shares to them.
In terms of legal documents, your shareholders agreement needs to set out clearly all issues that may arise between family and other shareholders. For example, you may want to safeguard company shares in divorce settlements by restricting permitted transferees; you may identify key issues on which all the shareholders must be consulted and give their consent; and you may wish to
create separate classes of shares with different voting and dividend rights. This last would also be reflected in the articles of association: your company very likely has standard ‘Table A’ articles (under the 1985 Companies Act) or ‘model articles’ (under the 2006 Companies Act), but in fact you can customise them to a large extent to suit your company’s particular needs, for example to change shareholder rights or meeting requirements.
A combination of the shareholders agreement and the articles of association will also help you to establish a proper board of directors (as opposed to everyone looking to you for all decisions) and their governance of the company. Part of this process will entail making sure that executives have proper service agreements to lay down the terms of their employment.
Why have a BSP?
As noted in the introduction, there is no obligation on you to think about, make or update a BSP. However, failure to have one generally results in:
• Loss of key information in the business
• A bigger tax bill
• Family issues
• Stakeholder uncertainty
• Loss of business value and leading to less wealth for the future.