Succession planning for a harmonious family business
Prime Accountants explain why being clear about what people want will help to keep your business and your family together when you are gone.
By Morgan Davies
Succession planning for a family business often begins from a position where everyone says “we are family and we trust each other”. And that’s a really good place to start.
But I’ve seen many cases in my time working with families where a lack of formal succession planning for a business can cause mistrust and arguments down the line if people are not on the same page of understanding.
On the other hand, if the family comes together and creates a constitution where people understand what their roles and responsibilities are, then everyone knows what to expect. This means that a principal stepping away from the business need not be a cause for nasty surprises.
No such thing as a typical family
Every family is different, so there is no ‘one size fits all’ approach when it comes to succession planning for a business. But here are some of the most common things I am asked to consider.
- Is succession the best option?
Unless you run a big and profitable company, a business can be hard to sell on the open market if you want to step away from it. Passing it on to your family may well be the best option if you don’t want to close the business down.
- But are you realistic about your business?
The best way to make sure you have a successful succession plan for a business is to make sure you are passing on a successful business in the first place. Too often people persevere at making a living off a business that simply isn’t strong enough, and that is not a situation you want to pass on to your family.
- Who is the best person to run your business?
It’s common for succession to fall to the oldest sibling, but I would strongly advise a principal to decide on the best person to run the business first and foremost, even if that is not the obvious choice.
- What if your family is not typical?
Family structures are more fluid these days. Succession planning for a business will allow your family to deal with unforeseen circumstances like divorce, and prevent your family’s wealth becoming diluted by circumstances outside of their control. It will also create a clear structure if you want to look after some members of your family even though they are not directly involved in the business, and especially if that person is your spouse.
- When is the best time to go?
Deciding when ownership will transfer is another critical factor when succession planning for a business. In some cases, it might be better to transfer ownership while the principal is still alive, so the family are properly motivated and in the best position to take the business forward for themselves. But bear in mind this can have an impact on your inheritance tax liability, where HMRC takes a share of your estate when you die if it is worth more than certain thresholds.
- What if you want to derive an income from the business while you are retired?
That’s perfectly possible, but speaking to one of our financial advisers will help you to decide from a tax point of view if you should take a lump sum straightaway, or draw down an income over time.
We’re here to help
These issues can be difficult – especially where families are involved – but they are not insurmountable. They can be resolved perfectly well with the right approach to succession planning for a business.
I’ve worked with many family businesses over the years and have found that I often end up as much their mediator and counsellor as an accountant.
I take that responsibility seriously.
Having spoken initially to the business principal, my approach is usually to start by meeting the family members on their own as a sympathetic but independent ear.
That way, I can encourage them to be honest about what they want and how they feel, before bringing everyone together to agree a constitution that, as far as possible, caters for everyone’s needs.
