The Key To Business Succession Planning

A strategic approach to business succession planning can help meet your personal and business goals. Ideally the plan will start well in advance of your intended ‘retirement’ date and will consider whether one or more family members will take over the business, if a management team is required or whether the business will ultimately be sold. Your plan may also consider life insurance/key man insurance, ‘pension’ planning and estate planning. Succession planning is integral to a company’s business strategy and operation.  

Business succession planning is personal to the family. It is about handing over assets to the next generations. When those assets comprise a business, succession planning could include: 

Extracting funds from the business and passing them onto to future generations in a controlled manner:  

  • A pension scheme could be established for family members, which the company contributes to. That pension may also be a vehicle for acquiring shares, funding the business and investing in commercial property. Different classes of shares with different rights may be desired to allow dividends to be declared.  
  • The company could take out a group ‘death in service’ plan thereby providing family members who are employees with mechanisms to assist with estate planning. A group income protection policy may also provide sick pay to employees if illness or injury prevents them from working for a prolonged period. Generally, premiums into these policies may be offset from corporation tax and not give rise to a benefit in kind. Medical insurance paid by the company will be a benefit in kind for employees. 
  • There is also then the possibility of employing family members, paying them a salary and offering benefits. However, employing a family member has risks. The family member may not be competent at the role or as the business expands, it may not be appropriate for them to continue in the role. Employing family members can be difficult especially if it doesn’t work out. 

Building the business to pass onto future generations: 

  • It will be necessary to identify whether it is realistic that a family member will succeed you. If they do, you will need to consider whether they are to be a shareholder with other family members or remunerated separately for their ‘employed’ role.  
  • If family members don’t want to or are not competent enough to manage the business the aim may be to put a strong management team in place. Th company may need to incentivise the management team to build loyalty and this would normally take the form of an enterprise management incentive (share) scheme.  
  • It is likely that the majority shares will pass either directly to family members or to a family trust and a relationship will need to be built between shareholders and the board. 
  • The method of exiting from the company needs consideration. The shares in the company could be gifted or a shareholder’s interests could be acquired by other individuals or even part of a company purchase of own shares. 
  • The facilitation of passing the business onto future generations may be done during one’s lifetime, upon death or a little of both. For those transferring on death, an appropriate will should be drafted. The options to consider are vast and may include the use of trusts, different classes of shares including capital growth shares, direct gifts and shareholder agreements.  

Building the business to sell: 

  • The intention may be to simply build the business for sale and undertake succession planning with the proceeds. However, if the shares qualify for business property relief, they could be a valuable tool in estate planning. In certain circumstances, trusts holding shares will also qualify for entrepreneur’s relief for capital gain tax purposes.  
  • Having sold a business, the vendor may have a considerable amount of wealth that they wish to pass on in a controlled manner to family members. See our previous articles on inheritance tax thresholds and family wills for more information. 

How To Start Business Succession Planning 

It is better to consider business succession planning early. The business may only be starting to grow, and you may have plans to build steadily over several years. However, identifying life events in advance as well as considering the business plan is essential if you are to maximise the effectiveness of succession planning. Life events and business plans change and so may your succession plan. The process of planning needs to be fluid and will involve a close relationship with a specialist adviser.  

We at Edge take a commercial view on assisting with succession plan because it requires an open long-term relationship. To arrange an initial discussion, email alane@edge-tax.comjmiddleditch@edge-tax.com or cjackson@edge-tax.com.