Time to pass on the baton – a business succession plan will help
For business owners looking to pass on a business to a new generation, a business partner, exit by way of a sale, or a sale to employees – the key is to start planning early. A succession plan is a good place to start.
Any business founder will say that running a business is all-consuming – it is more than just a job. It is little or no surprise then that thinking about retirement is often not top of the to-do list. It is, however, never too early to start thinking about succession if a business is to continue to grow and flourish once you decide to step down.
A succession plan will vary depending on the type of exit you are planning from your business. For example, passing to a family member will require a different approach to a trade sale. They all, however, will take time and have different tax implications.
The first decision to take is the type of exit you wish to make. In a family-owned business that may well be straightforward, particularly if family members are involved in the day-to-day running of the business.
It is often helpful to ask your accountant to explore those options with you, to act as a sounding board, and to discuss options with family members or co-directors. Their independence will bring a new perspective on any potential skills gap in the business when you leave and how they might be filled.
If a business sale is the right approach, you will need to appoint a solicitor to advise you, paying attention to whether you will be required to remain with the business for any period of time and, if not, whether any restrictive covenants are in place that might stop you working for a competitor or starting a competing business. Do not underestimate the length of time this can take.
In a family-owned business, it can, quite understandably, be difficult to let go entirely. However, your successor will want the freedom to continue to build on your legacy in the way they wish. Tensions can easily and quickly rise. It is important to consider in advance whether you want a role going forward and if so, what that role might involve. It is helpful to document those decisions to avoid later disputes.
It is also important to keep staff and any other shareholders informed of decisions. In some instances, it may be appropriate to sell to your management team or your employees via an Employee Ownership Trust (EOT). EOTs have attractive tax advantages but rigid rules that must be followed.
Whilst tax may not be the primary driver in succession planning it should not be ignored. A sale of a business, for example, can generate significant personal wealth and with it tax liabilities. Again, your accountant should be involved early on in these discussions to explain the various tax implications.
If you are starting to think about your exit and would like guidance on getting started with your succession plan and the tax implications, contact James Johnson below. James is a Principal and one of our experienced accountants in Milton Keynes.
