The importance of succession planning when operating a family business

26 November 2024

Operating a family business brings with it specific challenges on a day-to-day basis but when longer-term issues, such as who you will pass the business onto are considered, it is crucial to plan well in advance.

When you combine the goal of protecting a family business and managing Inheritance Tax liabilities with the already complex requirements of personal estate and wealth planning, it is clear that detailed organisation is required.

This guest post was reviewed by Jack Silk, Senior Wealth Planner at Killik & Co., with the original author credited at the end of this article.

Jack Silk

Senior Wealth Planner

What are some of the risks of not having a succession plan?

The future of the business

A business without a succession plan risks becoming unsustainable when key individuals exit the business. While some roles can be easily replaced, the knowledge and experience that leaves the business will often take more time. Further challenges can include:

Customer service failing to meet the previously high standards,
Loss of key relationships and connections impacting continuity with existing customers and clients, and
Loss of skilled or appropriately qualified individuals resulting in the inability to continue to provide the same services to clients.

Another significant challenge can be supplementing the workforce, as family members may work longer hours for the business than they would expect to work for a third party. If not factored into succession planning, this can impact profits and disrupt other staff members who are then expected to pick up a heavier workload.

Managing family conflict around roles and responsibilities in the event of succession is important to prevent division from forming within the business, and having this documented in advance helps to manage everyone’s expectations. Discussing and reviewing these points regularly can also help to manage the risk of unexpected events like the death or illness of key individuals and how these could impact business operations.

The tax position

A family business that has not considered the tax implications of the event of succession, could incur unexpected tax liabilities, particularly if any changes were to impact the businesses trading status.

Any payments due in the event of succession that could impact cashflow for the business will also need to be considered, such as paying out final wages, shares or dividends. We would recommend comprehensive retirement planning as you plan for succession to help determine income sustainability for the individual and to identify how to structure finances most effectively, as decisions made at this stage could also impact the tax position of the business.

What does succession planning involve for a family business?

Succession planning involves considering the legal, financial, tax and personal aspects of passing the family business on to the next generation and typically comprises several critical stages.

Open discussions

Transparent discussions around who will take on what responsibilities are an essential part of succession planning. Family members may have already expressed an interest in taking over the business at some point, but when making your succession plans it is important to be absolutely clear about who wants to be involved and who does not.

Deciding on successors

For the sake of your family and the business, you need to be sure that your successor(s) are capable of running the business when the time comes and that they will dedicate themselves to promoting its continued success.

Consulting the experts

Legal, financial, and tax advisors will confirm the importance of making a formal succession plan from their professional perspectives and you can check that the tax implications of your plan are favourable for all concerned. Family members may also find it helpful to make Wills and Lasting Powers of Attorney to ensure their wishes are observed for managing their well-being and estate.

Developing documents that ease succession

A shareholders’ agreement is a legal document that can ease conflict or deadlock between your successors. It sets out the shareholders’ rights and responsibilities and how to make decisions in certain circumstances. We recommend taking advice when drafting this agreement to ensure that it is written correctly and the business does not incur any unexpected tax consequences.

A family charter can also be beneficial when considering succession planning as it sets out how to manage family matters and highlights the responsibilities of specific family members. Although it is not legally binding, a professionally drawn-up family charter encourages open discussions and helps to arrive at a common understanding of succession and its implications for the individuals involved.

Training your successors

Training family members who are going to be involved in the business is crucial for a smooth transition to new ownership. Depending on their experience, this might involve shadowing you as you run the business, formal leadership and business courses, or mentorship.

Succession planning especially important for family businesses

Succession planning can be even more important for a family firm than it is for a ‘standard’ business due to the crossover of business into the personal lives of family members.

However, a succession plan isn’t a static document, as it should be reviewed at regular intervals to ensure that all it contains is still relevant. This is especially important if a change occurs within the family structure, such as divorce, marriage, or birth.

Tax treatment depends on individual circumstances and may be subject to change.

About the author: Jon Munnery is an insolvency and company restructuring expert at UK Liquidators, a leading provider of company liquidation services to both solvent and insolvent limited companies. Jon supports businesses at risk of insolvency and already insolvent as a result of creditor pressure and the build-up of business debts.