Planning for the future of your business is one of the most important steps you can take as an owner. Yet, a surprising number of small and medium-sized businesses fail to have a formal succession plan. According to the Federation of Small Businesses (FSB), only 35% of UK small businesses have a strategy for succession or exit.
Whether you’re considering stepping back in the near future or simply want to secure your business’s long-term health, succession planning is a critical process. Here’s what you need to know to get started.
What is business succession planning?
Succession planning is the process of preparing for a smooth transition in ownership or leadership of your business. It ensures continuity by identifying and training successors, addressing financial considerations, and minimising disruptions.
Good succession planning goes beyond finding a successor. It considers tax implications, the value of the business, and how the transition will impact employees, clients, and stakeholders.
Why succession planning matters
With a clear plan, businesses can avoid losing value, disrupting operations, or facing stakeholder disputes. It’s even more crucial for family-owned businesses to ensure clarity and fairness in transferring ownership.
The risks of not planning include:
- Reduced business value due to rushed or poorly planned transitions.
- Higher tax liabilities could have been mitigated with planning.
- Employee and client uncertainty leads to instability.
Steps to creating a succession plan
1. Start early
Succession planning is not a last-minute task. Ideally, you should begin at least five years before you plan to transition out of the business. Starting early gives you time to identify potential successors, train them, and address any challenges.
2. Decide on the type of succession
There are several ways to transfer ownership:
- Selling the business: This could be done by an external buyer, existing partners, or employees through a management buyout or employee ownership trust (EOT).
- Passing it on: Succession might involve transferring ownership to the next generation for family businesses.
- Merging or acquiring: Joining forces with another business could offer strategic benefits.
Consider your long-term goals and choose the option that best aligns with your business vision.
3. Value your business
Knowing the value of your business is essential for a fair and successful transition. Professional valuations can ensure accuracy, taking into account assets, earnings, market conditions, and goodwill.
4. Address tax and legal considerations
Business transfers can have significant tax implications, from capital gains tax to inheritance tax. Planning can help reduce liabilities and protect your financial interests. Engaging legal and tax professionals early ensures your plan meets all regulatory requirements.
5. Communicate your plan
Once you’ve outlined your succession plan, communicate it clearly with key stakeholders. This includes employees, family members, and other parties affected by the transition. Transparency helps build trust and reduces the likelihood of conflicts.
6. Test and update the plan
Businesses evolve, and so do personal circumstances. Regularly review and update your succession plan to ensure it remains relevant and practical.
Common challenges in succession planning
Finding the right successor
Identifying someone with the skills, experience, and commitment to lead your business can be challenging. Training and mentoring potential successors is a key part of the process.
Balancing family dynamics
Emotional factors can complicate succession planning for family-owned businesses. Open and honest discussions help set expectations and avoid misunderstandings.
Financing the transition
Whether selling to an external buyer or passing the business to family, financing the transition is often a hurdle. Options such as loans, deferred payments, or share schemes can make the process more manageable.
Real-world examples and lessons
Recent data from Family Business United shows that family-owned businesses contribute over £600 billion to the UK economy annually, yet, only 13% make it to the third generation. This underscores the importance of a solid succession strategy to preserve value and longevity.
In contrast, businesses that prioritise succession planning often see smoother transitions. For example, the growth of employee ownership trusts (EOTs) in the UK has allowed numerous businesses to secure their future while rewarding employees. EOTs offer significant tax advantages, including exemptions from capital gains tax on the sale of shares to the trust.
The benefits of planning
A well-thought-out succession plan:
- Preserves business value and continuity.
- Reduces tax liabilities and legal risks.
- Builds confidence among employees, clients, and stakeholders.
- Provides peace of mind for business owners and their families.
Next steps
If you’re ready to secure your business’s future, now is the time to take action. Begin by assessing your goals, seeking professional advice, and creating a timeline for the transition. Succession planning might seem daunting, but the benefits far outweigh the risks of inaction.
At GHLD, we’ve helped countless businesses plan for the future with confidence. From valuations to tax planning, we offer the expertise and support you need to make the transition as smooth as possible.
Contact us to learn how we can help you prepare for the next chapter of your business.
