Business owners minimise risks and maximise growth opportunities every day. It’s vital the same time and energy goes into considering the impact of personal estate planning.
Succession planning for family businesses ensures continued success if any owners retire, pass away, or lose mental capacity.
Many challenges come with protecting a family business on succession. This is largely because business life and personal life can overlap so much. A good succession plan will carefully balance the needs of all family members who work within the business. It’ll also help the owner to find ways of fairly treating non-working family members. When you factor in the complex and unforgiving inheritance tax regime, it becomes very important for a business owner to take specialist advice as they plan for the successful future of their business.
The present and future landscapes
Ongoing economic uncertainty, skills shortages, inflation, and the cost-of-living crisis have presented challenges for many businesses. These issues should provoke thought and discussion around business succession, or exit, plans.
The political landscape brings further uncertainty for business owners. With a general election due by January 2025, this raises concerns over possible changes to the tax regime. For instance, an increase to the rate of capital gains tax.
The combination of these headwinds and uncertainties has led some business owners to consider their exit plans. Some owners have even brought them forward. Others may have the aim of keeping the business in the family for future generations. In these cases, they'd be well-advised to consider succession planning for their business.
The core foundations of succession planning for family businesses
The structures around how a business operates are the core of family business succession planning. These structures, and the documents that underpin them, safeguard their long-term investment in the business for years to come.
The structures involved will vary and could include:
- Companies
- Partnerships
- Limited liability partnerships
- Trusts.
Legal documents can include:
- Pre- and post-nuptial agreements
- Wills
- Will trusts
- Lifetime trusts and carefully crafted letters of wishes
- Partnership agreements
- Shareholders’ agreements
- Bespoke articles of association
- Family charters
- Sale and purchase agreements.
There are many different options and business owners should consider in detail which structures are right for them and how these dovetail together.
Open conversations and managing conflict
The starting point is often dialogue within the family. If plans, wishes and aspirations between family members aren’t clarified, there’s a real risk of confusion.
If undocumented promises are made to a family member, this can result in hotly contested and expensive litigation. Creating expectations and formalising plans can avoid disappointing family members. This minimises the risk of damaging relationships across multiple generations. This also avoids costly legal challenges if there is a dispute.
Open conversations and the right structures and documents must be in place. This ensures family businesses and the families that run them have clarity and certainty for the future. It also serves to promote healthy working relationships within the family instead of breaking them. The moral: plan now for the future you want for your family business.
Understanding the business owner and the family
Strong succession planning starts with a comprehensive understanding of the current financial landscape. This includes an analysis of the asset, debt, and current and forecast turnover positions of the business. A clear understanding of the needs, aspirations, and ambitions of the individual family members both medium and long-term is also needed. As advisors, we need to know the drivers, concerns, and priorities of the individual. For example, protecting wealth or minimising tax could be a concern.
We can help guide business owners to consider what fairness means to them. This informs how they can divide business and personal assets between multiple beneficiaries and generations.
Effective succession planning can secure the future of a family business. Once a plan is in place, it then needs to be reviewed regularly. It’s especially important that it’s reviewed at life events, such as:
- Births
- Deaths
- Marriages
- Separations
- Divorces
- Significant business opportunities.
A plan that adapts as families grow, as business plans evolve, and as the economic, legal and tax landscape changes is likely to be the most successful. This can leave a legacy that continues to flourish.