Sonio Singh
Davis Blank Furniss

Forward thinking is key when it comes to succession planning for owner managed businesses

The UK economy continues to be dominated by highly proficient owner-managed businesses (OMBs) of all sizes. This is great to see – especially as successive governments have been such strong advocates of these entities, says Sonio Singh, partner in the corporate department at Davis Blank Furniss.

Most OMBs continue to review their short-term and long-term futures so robust succession planning is a vital issue. It’s therefore essential to plan ahead to ensure an effective exit strategy is in place that will benefit both those who exit as well as those taking the reins. It can be a complicated process but the following issues should be considered each and every time:

  • Your own income needs, your working life in the business and prospective successors who have the skills to run your business going forward.
  • The needs of your family and their future income as well as principles of equity between children/other relatives.
  • The role and attitudes of other shareholders and how the succession plan will impact on them.
  • Last but not least, how your departure as a hands-on owner/manager will actually affect the business (including your key customers and employees).

Legal issues are of course key and as a primary step, undertake a detailed review of all the relevant constitutional documents for the business (e.g. the Shareholders Agreement/Articles of Association for a limited company or the Partnership Agreement/LLP Agreement as appropriate).

It is vital that any succession plan is capable of implementation and of course owners need to check that they are not restricted by any provisions regarding the transfer of shareholdings/partnership shares. Following this due diligence process, you may seek to change the relevant constitutional provisions and/or the corporate structure of the business. This can be difficult – especially when the business has already accrued value.

For this reason, it is always advisable to ensure your constitutional documents are in place from the very start. When they are, check the following areas:

  • The procedure for share transfers including rights of pre-emption, the ability to give shares to family members and cross options.
  • A review of any relevant drag-along or tag-along rights in terms of any disposals of the business and voting trusts/weighted voting rights.
  • The valuation mechanism for any shareholding/partnership share.

As well as reviewing the legal considerations of succession planning, it is vital to take into consideration any tax consequences. Efficient tax planning and detailed tax advice are absolutely paramount in mitigating any tax liabilities and/or maximising reliefs as the tax effect on any disposal or restructuring will significantly affect the bottom line of a carefully run family operation.

It is also important to note that you will often be dealing with both Capital Gains Tax and Inheritance Tax, so the interaction of these taxes and all relevant exemptions, reliefs and planning opportunities shouldn’t be overlooked.

Although legal and tax issues take centre stage, there are other more emotive issues that need to be considered:

The effect of succession planning on employees, the need to take into account employee aspirations and avoiding instability.

Careful consideration must also be given to issues such as retention-based bonuses and employee share ownership schemes and other incentivisation tools.

The suitability of the next generation to operate the business: whilst formal education, training, work experience and motivation may assist the next generation, you may consider that the appropriate course is that the business and the family part ways and that you look at a wholesale disposal. Alternatively, if there are no obvious managerial heirs, then there is the option to buy in key managers but retain the shareholding in the family.

In conclusion, passing on a carefully constructed family business can be a huge challenge. Taking detailed professional advice and making the right decisions for you, your family and the business operation itself remains a careful balancing act. The best way forward remains to identify the key issues as early as possible and take advice on them.

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