Business owners: don’t forget about succession planning

On behalf of Attwaters Jameson Hill posted in Trusts & Tax on Wednesday, June 23rd, 2021

According to a study conducted last year by the Institute for Corporate Productivity, 44.4% of businesses had no formal approach to succession planning, while 10% performed no succession planning whatsoever. Even the largest companies struggle; research suggests that two thirds (68%) of all FTSE 100 companies have issues with succession planning.  

What is succession?

According to the Institute for Family Business, the term succession refers to the “process of transitioning the management and the ownership of your business”. It is a long-term process that, in the words of the CIPD, “focuses on identifying and growing talent to fill leadership and business-critical positions in the future.”

Why is succession planning important?

The recent pandemic is probably one of the best examples of why succession planning is so important. From one day to the next, the entire world was plunged into lockdown, many people fell ill with coronavirus and thousands tragically died. In the midst of the chaos, businesses lost vital people at an already critical time. Succession planning ensures that businesses have a qualified candidate already in place, with the skills required to step into the breach.

It is also important for tax planning purposes, particularly within family businesses. Consideration needs to be given to the Capital Gains Tax (CGT) and Inheritance Tax (IHT) implications of giving or leaving shares to family members, the availability of any tax reliefs and the use of ownership structures such as trusts in order to minimise tax liabilities.

Creating a strong succession plan

Creating a strong succession plan involves identifying the impact on the business of each key member of staff (including yourself) and selecting succession candidates before an unplanned departure.

When you identify a candidate for succession, it is important to have a conversation with them to ensure that your plans align with their own aspirations. If so, it’s time to start investing in training and professional development for your selected candidate to ensure they are properly prepared. If you get the chance, you may wish to do a ‘trial run’ of your plan by allowing the employee to assume the responsibilities of a manager while they are on annual leave, for example. This will not only provide the candidate with further training, but will also indicate whether or not you were correct in your choice.

As well as focusing on internal candidates, a good succession plan should also help identify any talent gaps within the company and provide a framework for external recruitment.

Passing on the company

For family-run businesses, a key part of succession planning is the process of passing the business on to the next generation. It can involve asking difficult questions, such as ‘are my relatives the best people to take the business into the next generation?’ and ‘do my children/grandchildren even want to work for the business?’

Successfully passing on a family business means opening up clear and frank discussions about the future. It involves deciding whether relatives should be directly involved in the management of the business, or simply shareholders. Would it be best to recruit external managers to take on responsibility for the day-to-day running of the business? Conversations like this can be difficult to manage alone, which is why many business owners instruct a lawyer to help facilitate positive discussions.

An experienced lawyer can also assist with Inheritance Tax (IHT) planning; passing on assets such as business shares can incur IHT, but there are a number of reliefs (for example Business Relief) that can greatly reduce the sums your descendants will have to pay.

You don’t have to do it alone

Our expert Company & Commercial and Wills, Trusts & Probate teams work together to help business owners pass down their business and wealth successfully to the next generation. We take the time to learn about your business and aspirations for the future, before helping you draw up a robust plan to meet the challenges your business may face. Please get in touch on 0330 221 8855

Sources:

https://hrexecutive.com/wp-content/uploads/2020/02/SURVEY-RESULTS-Succession-Planning-Management-Study-HRE.pdf

https://www.peoplemanagement.co.uk/news/articles/ftse-100-boards-exposed-by-lack-of-future-talent#gref

https://www.ifb.org.uk/resources/succession-planning-in-family-business/

https://www.cipd.co.uk/knowledge/strategy/resourcing/succession-planning-factsheet#gref

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