None of us live forever.
Are you happy for your business to die with you?
It doesn’t need to.
What is succession planning?
Succession planning is all about who will own and/or lead the business in the future.
When you no longer have the ability or desire to do so.
Pass it to your children
Traditionally we think of “Bloggs and Son”. Parent passes business to child.
This in itself can have issues:
- parent has run business for decades, but falls behind the times
- child has less experience, but full of new ideas they want to implement
- parent frustrated with impetuous child, wanting to make rash decisions, risking destroying a good, stable business
- child frustrated with stuck in the past parent, refusing to accept the world moves on and they must modernise or become obsolete.
Passing the business to children is one option. They then pass to their children, and so on indefinitely. That could be the succession plan.
This option isn’t open to everyone. Not everyone has children. Also not every child wants to follow in their parents footsteps!
Possibly they have no interest in the business. Or possibly they do, but don’t have the skills required to take it over.
Fortunately children aren’t the only option for succession planning.
What are the basic elements of succession planning?
You need people who:
- have capability to take the business forward
- have desire to take the business forward
- give stability to the business long term
They need ALL the above:
- if they lack brain/savvy to lead, staff will lose faith
- if they lack heart/energy to lead, staff will be uninspired
- if they lack stability to lead, staff will lose confidence
Leaders need to:
- care enough to want to fix mistakes
- be driven enough to ensure they fix them
- be intelligent enough to learn and not repeat them
What are the options for succession planning?
There are multiple ways you can pass your business on to others. We summarise 5 below, in no particular order:
Children
As mentioned above.
Here, often finances are less relevant. You’re not expecting your children to pay fair market value for the shares.
They’ll inherit them. Sure, you may insist they “earn” them…but likely on more generous terms than an unrelated employee.
Your children are still mortal though, like you. Hence they’ll have the same dilemma in years to come.
Management Buy Out
MBOs are another option.
Here, you’re more likely to insist on them paying close to fair market value. Though often a question mark over how much finance the senior team can raise.
It is a form of succession planning. Generally (though not always) the management team who have worked for you will be younger than you.
Again, at some point they’ll be ageing, and wondering what to do with their shares.
Trade sale
Sell to an unrelated third party.
This typically has a very different dynamic, as the purchaser is external, rather than internal.
No reason for you to do them any favours, sell for full market value.
The business is unlikely to continue in a similar fashion. Normally your business will be absorbed into the buyer’s business.
Stock exchange listing
This one’s realistically for big players only. The costs and admin of being listed on a recognised stock exchange are huge.
However, by making the shares readily bought/sold, it is a long-term way of “solving” succession planning.
Plus many shares may well be bought by institutions, like pension companies, rather than mortal individuals.
Employee Ownership Trust
Sell to a trust set up to look after all company employees, current and future.
John Lewis handed control of their family business to an EOT a century ago. The ownership hasn’t changed since. How’s that for succession?!
In 2014 legislation made it much easier, and more beneficial, for business owners to sell their companies to an EOT.
EOTs have many of the best bits of each of the other options above:
- ability to sell for full market value
- looks after those who work there
- likelihood the business brand/culture will remain
- the trust is immortal, so it’s a long-term succession plan
- …plus great tax breaks too!
Who is responsible for succession planning?
The decision is of course something for the current business owners to make. You might have input from family members or close friends, but it’s your business, your choice what you do with it.
Typically there will need to be some involvement from professional advisers at some point, in turning the idea into a sensible, thought through plan. I.e. advising on legalities, risks, finances, tax etc.
Leadership vs Ownership
In most small companies, ownership and leadership come together.
The primary/sole shareholder is normally the primary/sole director.
There’s nothing wrong with this. Most businesses start from nothing. On day one it was just the owner as sole director, and sole worker.
As the business grows, it recruits a team. These gradually take roles away from the owner.
It’s rare the owner will recruit someone to a position above them.
Even if they did (i.e. appointed someone else as director, and potentially demoted themself), by virtue of being the main shareholder, they have the power to remove that director.
Hence the owner realistically always retains ultimate leadership/power.
Employee Ownership changes all that!
The directors will still lead the company.
But there is a separate body (the EOT) which owns the company.
The directors do not control the EOT, the trustees do.
The trustees legally have power over the directors.
And the employees elect the trustees.
More info re EOT structure/powers
11 reasons EOTs are great for succession planning!
- Receive fair market value for your shares, based on independent valuation.
- Zero capital gains tax on the sales proceeds.
- Transfer when it suits you. No external third party with their own timeline to work to.
- Want to continue working in the business a while longer, cutting down your hours gradually? You can. No need to leave as soon as the deal is signed.
- Staff don’t risk their own money. No staff members have to buy in.
- Simple to operate once set up. Looks after all staff current and future without any further buying/selling of shares.
- Gives employees real power. They can elect trustees, who can potentially oust bad directors.
- Beautiful synergy of efforts and rewards. Business profits go to staff that generate them.
- £3,600/year tax free profit share bonuses for staff.
- Employees become stewards. Each generation of employees can look after the business, grow it, and leave it to the generation that follow.
- Trusts are immortal, unlike people. Hence this is a long-term succession plan. John Lewis is still going strong a century after becoming EOT controlled!
Summary
There are multiple options for passing on your business:
- Succession planning isn’t always about parent -> child
- How important is a decent pay out to you?
- How important is the business retaining name/culture to you?
- Size of the business will impact options available
- EOT is a great option for businesses with 5+ staff