The operational needs of running a business can be all-consuming but the past 12 months have highlighted the importance of succession planning. The Covid-19 pandemic has shown how physically and mentally challenging uncertainty and disruption can be whereas continuity preparation is a useful tool to help drive future growth, help reduce taxes and preserve harmony within families.
Succession planning tends to come to the fore as a retirement looms but it is not the only driver forcing proprietors out of 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 are able to exit under fair circumstances.
A good starting point for consideration would be:
• Identifying potential successors and considering how their skills could be developed to ensure the long-term success of the business
• Ensuring all financial documents are consolidated, up to date and available
• Are formalised, standard operating procedures in place?
• Value 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 will take over and how other heirs will be compensated
• 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?
• 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.
The succession planning process is inevitably complex but to avoid ambiguity working through the process can help everyone involved.
ILS World is a global provider of independent fiduciary services assisting with compliance, administration, asset and advisory services to businesses and private clients.
We act in the long term interest of our clients, creating long-term relationships and providing high service levels. We work to be approachable, flexible and pragmatic offering regular face-to-face meetings as required. Members of our team have diverse backgrounds, skills and interests and their professional experience together with their "can-do" attitude means they understand that wealth and business is inextricably linked.
To keep up to date follow us on LinkedIn.
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.