Whether you’re heading for retirement, exiting a business for pastures new, or simply handing over the reins to young blood, the process of planning for departure is one that requires careful consideration to ensure the business is structured correctly and the ‘heir apparent’ is well placed to complete a smooth transition.
So, what are the biggest considerations and challenges facing business owners when gearing up for that crucial handover?
Firstly, it may seem obvious, but it’s important to establish who is best equipped to take over the business. Academics believe that insiders make far better successors than those drafted in from the outside. But, far too often assumptions are made about these individuals, without actually clarifying what these responsibilities would entail and identifying whether it’s a job they really want, or are qualified to do. What’s more, very little thought is often given to implementing a comprehensive training and knowledge-sharing process to ensure it will be ‘business as usual’ following a change in leadership.
Timing is everything, particularly when exiting a business. Management of succession should be at the core of how a business is run and not an after-thought once a decision has been made to leave. Unsurprisingly, surveys continually show that a significant proportion of business owners don’t have a succession plan in place. They often put it down to time constraints, while running the business, or an uncertainty about who will take over responsibility. That said, businesses are constantly evolving, so regular consideration should be given to updating a carefully-crafted succession plan, to ensure it reflects the company’s current and future state.
In the current economic climate, many business owners have chosen to push back their exit plans to account for underperforming investments, or problems related to their company’s cashflow or debt burden.
Although conditions are improving, it’s important to have an open and ongoing dialogue with your bank, to ascertain if there’s any scope to rewrite existing debt and potentially release extra capital for the business’ future development.
The issue of ownership is extremely important – are you exiting completely; are you retaining a stake of the business without day-to-day control; or do you wish to remain at board level in a lesser capacity? The structure of ownership will vary dramatically, depending on your future plans. When it comes to transfers, these may involve family members or management insiders and typically aim to maintain continuity of leadership and protect the value of the company. A successful transition plan will outline both the transfer of control of the business to the designated successor, as well as the transfer of assets, which may involve several individuals.
This process will require the involvement and cooperation of the business owner’s legal and financial advisors, as a team approach is often best practice.
Financial advice and due diligence
The value of due diligence is just as great in transferring a business, as it is when looking at potential acquisitions. It’s essential to review the business’ accounts, finances life assurance protection and any existing pension funds to ensure all tax and family protection issues are covered.
Pension funds – company and personal
When retirement comes into play, the issue of pension funds becomes a firm player in any succession plan. SSAS are widely considered to offer the pension path for people who run their own business, as they allow members to control their fund, can be used to invest in the business, are flexible and can be utilised to buy the commercial property for the business to occupy.
During the succession planning process, it’s important to consider whether people, in particular children, need to be added to the SSAS – defining what their contribution should be. Adequate funding of the plan for the retiring generation helps to achieve a smooth transition for the generation taking over in family businesses.
When to exit a business is never an easy decision to make – and not one that immediately springs to mind when drafting a company meeting agenda. But, the challenges and considerations that come with leaving a company should remain firmly on the board room table, regardless of whether the move is in five, ten, or 15 years’ time.
Steve Rees is MD of Carpenter Rees, a UK financial consultancy for families and family businesses
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