What does succession planning really mean?

A recent article in The Economist about family-owned businesses and the challenges many are facing as they prepare to pass ownership and leadership to the next generation noted that only 57% of US family businesses have a succession plan in place and highlighted the difficulties many families face when considering succession, inheritance and questions of ownership.

There also seems to be a growing fascination with family dynasties at the moment whether through television dramas such as ‘Succession’ or headlines about some of the world’s largest family-owned businesses. Succession planning is a topic that is becoming increasingly relevant for many business owners.

Over the next decade thousands of business owners will face one of the most important decisions of their working lives: when and how to step away from the businesses they have spent years building.

Recent research suggests that almost one in ten UK company directors is already working beyond state retirement age and more than a third of new businesses are started by people aged 50 and over. It is perhaps no surprise, therefore, that conversations about retirement, succession and the future of family wealth are becoming very important for many business owners.

What is succession planning?

In practice the term “succession planning” can mean different things to different people, and when speaking with clients, friends and family it is often viewed as a single concept. But it actually encompasses several different areas and that’s where the confusion usually begins.

There is no universally accepted definition but in this blog we’ve broken succession planning into three different areas: business succession, family and estate succession, and personal succession.

Business succession:

This type of planning focuses on the future of the business itself, i.e. what happens to the business when the owner retires, becomes incapacitated or passes away? Will the business be sold to a third party? Will management take over? Will ownership pass to family members? Or will an alternative structure such as employee ownership be considered? The objective is to ensure that the business can continue successfully and that the value built up over many years is protected.

Family and estate succession:

This type of planning focuses on what happens to a person’s wealth and assets both during their lifetime and after death. Who should benefit from shares, property, investments and other assets? Should anything be passed on during lifetime? Are wills, trusts or other planning arrangements needed? How should tax, family circumstances and fairness between beneficiaries be considered? The objective is to ensure that wealth is passed on in a way that reflects the individual’s wishes and wider family circumstances.

Personal succession:

The third area is personal succession planning. This is where individuals and business owners consider what they actually want their own future to look like. Do they want a clean exit or a gradual transition from their business? Do they need the proceeds from a business sale to fund retirement? Are there other assets and investments available to support them? Do they have a sufficient pension? Do they intend to continue working in some capacity or step away entirely? The objective is to understand what the owner needs from the business before deciding what should happen to it.

One of the most common mistakes business owners ask is “How do I pass on my business?” before first asking “What do I need from my business to achieve my personal goals?”.

These three strands of course rarely exist in isolation.

Let’s use an example:- a founder wishes for their daughter to take over the family business – this appears to be a straightforward business succession decision. However, the founder also has two sons who are not involved in the business – a number of wider questions immediately arise: should the daughter inherit the business outright? How are the sons treated fairly? Do other assets compensate the sons? Is there enough liquidity in the estate? What are the inheritance tax implications?

Suddenly what appeared to be a business succession issue becomes a family succession issue as well.

This overlap is particularly common with business owners because the company itself can be the largest asset and generate a significant proportion of their overall wealth.

An assumption heard quite often and seen reflected in the media, is that children will simply take over the family business one day, which sometimes is the right solution but it’s not always as simple as that. The next generation may have different ambitions, different careers or different priorities. Equally, many business owners assume they will simply sell when the time comes only to discover that preparing a business for sale takes considerably more planning than expected.

The most successful succession plans are usually developed well before they are needed. They provide business owners with choices and create certainty for family members and importantly, they help ensure that the value built up through years of hard work is preserved rather than left vulnerable to unexpected events or rushed decisions.

The reality is that every business owner will leave their business one day, whether by choice or through circumstances beyond their control so the real question is not whether succession planning is required, but whether enough thought has been given to what happens next to the business, the owner’s wealth and ultimately the legacy they leave behind.

Talk to our team

At Fisher Jones Greenwood, we understand that succession planning can be complicated. Our experienced corporate commercial lawyers provide clear, practical advice to help you navigate this process with confidence and achieve the best possible outcome.

Natasha Bhandari is a Senior Associate in our Corporate & Commercial team at Fisher Jones Greenwood LLP. She advises entrepreneurs, owner-managed businesses, family enterprises, SMEs and large corporates on strategic corporate transactions and structural matters. Her work includes share and asset acquisitions and disposals, management buy-ins and buy-outs, joint ventures, restructures and shareholder arrangements.

For further information or to discuss how to plan for succession, please do not hesitate to contact our team using our online contact form or call 0845 543 5700.