The operational needs of running a business can be all-consuming but taking time out to prepare for a smooth transition to the next generation can be the catalyst for future growth, help reduce taxes and preserve harmony within a family.
Succession planning tends to come to the fore as a retirement looms but it is not the only circumstance leading to proprietors relinquishing ownership. Unexpected life events can happen at any age and continuity plans ensure the right people inherit the business, operations continue to run smoothly and owners can exit effectively.
Points to consider could be:
• Identifying potential successors and consider how their skills could be developed to ensure the long-term success of the business and engage with them as early as possible.
• Ensuring all financial documents are consolidated, up to date and available
• Formalised, standard operating procedures are in place
• Valuing the business, including the methodology
• Contemplate the merits of buy-sell agreements which are legally binding contracts used to reallocate portions of a business.
The most common succession plans involve:
• Selling a business to a co-owner
If you established a business with a partner or partners, you may consider your co-owners as potential successors. Many partnerships draft a mutual agreement that, in the event of one owner's untimely death or retirement, the remaining owners will agree to purchase their business interests.
• Passing a business to an heir
Deciding on an heir as your successor is a popular option for business owners, especially those with children or family members working in their organisation but it is not without complications.
Consideration points include:
• Determining who is best suited to take over the family business, taking in to account their business acumen, experience and whether they actually want to take on the responsibility.
• How will other heirs be compensated? Ensure this is discussed in advance to avoid potential family conflict in the future.
• A buy-sell agreement allows heirs not active in the business to sell their shares to those who are.
• What will the future leadership structure look like and do they have the same strategy and values?
• Selling a business to a key employee
If you don't have a co-owner or family member to entrust with your business, a key employee might be the right successor.
• Selling a business to an outside party
When there isn't an obvious successor owners may look to the wider business community - is there another entrepreneur, or even a competitor, that would purchase your business?
• Selling shares back to the company
An entity purchase plan is an arrangement where the business purchases life insurance on each of the co-owners. When one owner dies, the business uses the life insurance proceeds to purchase the business interest from the deceased owner's estate.
Succession planning is inevitably complex and challenging but to avoid ambiguity working through the process can help everyone involved.
ILS World is a global provider of independent fiduciary services to professional advisers, international corporate groups and private clients. With more than 30 years' experience, we work with many successful entrepreneurs and assist the C-suite in safeguarding businesses and mitigating risk.
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Please note: ILS World does not offer tax advice and would therefore recommend you obtain your own tax advice. If you require an introduction to a tax adviser we would be happy to assist.