Succession planning - avoid leaving it too late

Good succession planning is an intrinsic element of business planning and it is essential to unlock the value that you have created within your business. There are strategic, financial and human resource issues to be considered and these are best done sooner rather than later, in order to maximise your return and minimise the tax liabilities.

Corporate and commercial law specialist Robert Goddard, explains what you need to consider and how to effectively plan the succession of your business.

The best time to prepare how you exit from your business is at the start or, at the very least, several years before you intend to exit. This enables you to decide what you want from your business and what you want the future of your business to be. If you did not plan your exit from the beginning, now is the time to do it, even if you have no intention of exiting any time soon.

A key consideration is who will run the business when you leave. This will be closely tied to your options for disposing of the business. For example, if you intend to sell to a family member, consider whether they are ready to take over from you and whether all your staff are on board with that decision.

If you are not the sole owner and have partners or co-shareholders, there should be a clear shareholder agreement in place to manage the exit of a shareholder. If there is not, you should seek appropriate advice about getting such a document in place. This is harder to achieve if you and your partners have been in business for some time as interests have now become vested and sensitivities will come to the fore. However, a well-managed process can generally resolve any issues and will benefit all parties.

A key consideration when negotiating such agreements is to note that sometimes clauses are included which set out a formula for valuing the business at which the exit would take place. Great care should be taken in agreeing these clauses, or in fact, agreeing to them at all, as they can lock you in to a value which may be an undervaluation of the business at the time of the exit.

Always consider the tax implications and take professional advice regarding the capital gains tax and inheritance tax implications of your exit.

There are a number of options when it comes to planning an exit strategy and the one you choose will depend on your own objectives and wishes for the future of the business. The three main options are:

Keeping it in the family

If this option is available, then it is imperative that a succession plan is established as early as possible. Your chosen successor needs to be well-trained, having the confidence of staff, suppliers and customers, as well as understanding the strategy of the business. This is never more important than when your chosen successor is a family member. Tax reliefs are available in these situations, such as the business property relief under the inheritance tax regime, as well as some tax planning opportunities such as the use of trusts to hold shares. So it is essential to seek legal advice to understand how you could qualify for these.

Management buy-out

This may be an option where you have a good management team. However, you will need to establish whether the proposed members of the buy-out team are suitable owners of the business. Will they be able to satisfy financiers regarding their credibility to own and manage the business? Time spent on grooming key staff in management skills and business acumen will pay off. Careful planning and well-drawn agreements are required to set out how the management buy-out will be structured and financed, the value at which you exit and the transfer of assets.

A trade sale

If the success of your business relies heavily on your skills, then the most valuable asset in the business is lost when you leave. Potential suitors will want to know that there is a sustainable business in place with access to markets or products they actively seek. Putting key well-trained management in place before making the business available for sale will soften the impact of you leaving. Consider also the possibility of staying involved in the business for a period after the sale as a consultant to enable a smooth transition of the business to the new owners.

There are additional options for exiting your business such as listing on the stock market, merging your business with a competitor or liquidating if you have no other option. Planning, forethought and considered advice will ensure a successful exit from your business. Whatever exit route you choose will require specialist advice to manage your liability for capital gains tax, and planning ahead really pays.

Finally, throughout the process, it is important to ensure that your business retains a good profile. Compliance with all the necessary regulations, duly filed tax returns, company returns and accounts will be assessed by potential buyers with the same weight and gravity as the client list and asset register. Whichever exit strategy you adopt for yourself, establishing and maintaining good business practice will be a vital part of that plan.

For an informal and confidential discussion regarding your long term plans contact Robert Goddard

Disclaimer

The content in this article is for general information only and should not be regarded as an exhaustive analysis of the law. It is provided to the public free of charge, does not constitute legal advice and must not be relied upon as such to make any decisions. For that reason users should seek specific legal advice about any matter which concerns them.