When planning for the future of your business, succession planning becomes crucial, especially if the business is a significant part of your legacy. Unlike personal wealth, which can be directly inherited, a business often requires careful consideration of who will manage and sustain it. This article focuses on determining who will inherit your business and how to ensure its continued success.
Key Considerations in Succession Planning
For business owners, especially those in the first generation of ownership, two primary questions arise:
- Who will inherit the value of the business?
- Who will take on the responsibility of running the business?
These may not always be the same person. Some family members might contribute significantly to the business, while others do not, necessitating a clear strategy for future management to sustain the business’s value and growth.
Case Study: The Goodwood Legacy
The Goodwood Estate, managed by the Dukes of Richmond and Gordon, exemplifies effective succession planning. The late tenth Duke and his son, then called Lord March, revived the Estate’s motor racing circuit in the 1990s. Today, Goodwood is renowned for its diverse activities, including motor racing, golf, horse racing, and hosting events. This successful transition illustrates the importance of an entrepreneurial mindset and careful planning.
The Entrepreneurial Cycle
Business owners typically progress from an initial idea to building a substantial and self-sustaining enterprise. As they age, often in their mid to late fifties, their focus shifts from growth to succession planning. Questions about where to begin, who to trust, and how to handle family dynamics become central.
Forming an Advisory Panel
A useful step is to form an advisory panel comprising both internal and external members to provide an objective assessment. This panel helps in making informed decisions about family members’ roles, ensuring they are appointed based on merit, not just family ties. Experience outside the family business can be beneficial for family members to bring fresh perspectives.
External Appointments
Appointing an external CEO can sometimes be the best option, ensuring professional management while family members continue to benefit. Incentivising the CEO with equity stakes can align their interests with the business’s success.
Timing the Transition
Determining the right time for the business owner to step aside is crucial. This decision should be accompanied by transparency with the family and an established plan for the business’s future management. A family constitution can formalise policies on ownership, management, remuneration, and dispute resolution.
Meticulous Planning
Open communication with family and advisors is vital to avoid surprises. Having a trusted confidant outside the board who can offer unbiased advice on financial and legal matters is equally important. This critical friend can help structure the business for future success.
Framework for Discussions
The family constitution should address key areas:
- Ownership and policy setting
- Day-to-day management
- Ownership options for family members
- Policies for family members who wish to withdraw
- Remuneration and dividend policies
- Dispute resolution mechanisms
If selling the business becomes necessary, a mechanism should be in place to respect family decisions, ensuring a majority consensus.
Advance Planning
The timing of succession planning varies based on the business owner’s readiness and external opportunities. Selling the business to a third party might sometimes be the best option, especially if it opens new growth avenues. Conversely, some businesses are closely tied to the owner’s personality and might need to continue under their leadership until the end.
Options for Passing on the Business
For those deciding to pass the business to their children, there are two main approaches:
- Transfer shareholdings directly.
- Set up a trust fund to manage the shareholding.
Preparing the Successor
If the preferred successor is not ready, appointing an external interim leader while the successor gains experience can be effective. Sensitivity and respect towards the interim leader are essential to ensure a smooth transition.
Case Study: Timpson’s Upside-Down Management
John Timpson’s succession plan involved handing control of his business to his son, James, in 2002. James continued the ‘upside-down’ management style, crucial for the business’s growth. This example underscores the importance of maintaining the founder’s values and management style.
Individualised Approach
Succession planning is highly personalised, dependent on individual circumstances, relationships, and accumulated wealth. It is essential to address each stage thoughtfully, ensuring a smooth transition.
Conclusion
Now might be the time to start those essential conversations about succession planning. Deciding who will inherit and manage your business ensures that your legacy continues successfully and your family benefits from the wealth you have created. Planning early and meticulously will help secure your business’s future and protect your family’s interests.
About The Author:
Stuart Ritchie is an expert tax advisor with over 30 years of experience in the field who founded his own accountancy firm Ritchie Phillips LLP in 2003, through which he provides specialist taxation and accountancy services. Ritchie is also a fellow of the Institute of Chartered Accountants in England and Wales (ICAEW), a member of the Chartered Institute of Taxation, and a chair of the ICAEW Tax Faculty Private Client Committee. This provides him with a unique insight into the developments and trends within the world of high-net-worth and ultra-high-net-worth individuals.
