How to secure the long-term success of your business with a solid succession plan

There are numerous examples of well-established businesses that have failed or struggled due to lack of succession planning, including household names such as Kodak and even Walt Disney.

Smaller businesses are not immune and, in some respects, could be at greater risk due to over reliance on certain individuals. As the saying goes, “if you fail to plan, then you plan to fail”.

How do you effectively plan for the long term security of your business, and futureproof against the unexpected?

Secure the next generation of talent

For most businesses, the starting assumption is that they will grow, develop, or maintain positive results over time. When planning for succession, the focus will usually be to identify the "next generation" of talent in the business.

Some businesses will already know who that is within their business. For them, the focus could be to ensure those individuals are adequately locked in.

This might be through:

• Competitive remuneration
  Even the most loyal employees can have their heads turned by better paying opportunities. Benchmarking salaries regularly can help alleviate this risk. Headline salary is only one aspect; bonuses, benefits and equity should also be considered (see below).

• Engagement
  A disengaged employee is unlikely to remain in situ for long. Identifying what employees need and want is crucial - perhaps through engagement surveys or employee counsels. Strong communication and HR policies, particularly around learning and development, and performance and exit reviews, are some of the relevant factors within the control of the business.

• Equity incentives
  A tax efficient share plan can be a great method to lock in employees by allowing them to partake in capital, dividend and voting along with other shareholders. These can be structured flexibly to reward employees immediately or over time, or both, and to benefit from Capital Gains Tax (at as little as 10%) rather than the higher rates of PAYE and NIC (as much as 47%).

Find out more: Fostering Social Responsibility: Equity Incentives and Employee Ownership Trusts

• Benefits
  Many employees will value benefits such as pension contributions from their employer. This can be tied to tax efficiency with a salary sacrifice plan. Other benefits such as private medical insurance, company cars, and healthcare are also popular. Employers will also wish to ensure their mental health support is robust and provide coaching to their teams to prepare them for succession.

Many of these points will also be key considerations for businesses who have not yet identified their successors and may be looking externally.

Exiting a business effectively

For some businesses, succession will also be intertwined with "exit planning" for one or more existing owners. In these situations, employers may be thinking about:

Management buy-ins and buy-outs

Where the future team are already well established, could they buy in to the business, or buy-out existing owners? There will be the obvious issue of whether the incoming team can afford to do this, although with planning a low-cost buy-in or one supported by the business may be possible, whilst also allowing current owners to exit on their own terms and tax efficiently.

Find out more: Management buyout: Key tax issues for business owners

Employee Ownership Trusts

These allow owners to sell their shares to a trust for the benefit of all employees. This model was popularised by John Lewis but is growing in popularity amongst small and medium sized businesses too, due to its flexibility and the ability for vendors to realise gains at an effective 0% tax, provided various conditions are met.

Find out more: Celebrating the benefits of Employee Ownership

Family succession

Owners may be looking closer to home for their successor in which case they should be preparing the next generation through training and mentorship where needed, to help family members integrate and/or step into leadership positions. Internal governance should be reviewed to ensure the company's constitution and procedures, along with the tax issues on handing over ownership, enable a smooth and cost-efficient transition.

Find out more: Adding Family as Shareholders in a UK Company

Third-party sale or investment

In some cases, this may be best for some businesses, owners, and their teams. However, it can be a lengthy, costly, and invasive process, so businesses should engage early with suitably experienced professionals to guide and support them.

Disaster planning

Of course, sometimes the unexpected happens. Good planning should help to keep business on track:

• All businesses should have a business continuity plan in place and should seek professional assistance if they need help with this. A periodic review is also recommended. Consider establishing a crisis management team to pick up operations in any transitional period.
  
• Businesses should review their constitution to ensure that in a disaster scenario their wishes are followed. For example, if a shareholder was to die, what happens to their shares - will it be appropriate for their family to take ownership? If it was not, then how would the share value be realised, and funded?
  
• Keyman insurance, to protect the business against the loss of key individuals should be considered. Shareholder protection may also be relevant to ensure funds are available to buy out shareholders in the event of their death and thus help limit disruption or financial stress on the business.

Planning is key

There is no “one size fits all” approach, and the above is only a brief overview of some of the potential issues and solutions. The key in all cases is to establish a robust succession plan, and to then undertake regular reviews to ensure the plan reflects changes in personal and business circumstances.

Professional support should be sought to ensure the plan is robust and efficient from a legal and tax perspective.