Family Business Succession Planning Top Tips

One of the biggest challenges you face as an owner manager will be how best to pass onto the next generation the value you have built in your business. Use these top tips to kick start your family business succession planning to ensure a smooth successful transition.

Below are tips to make succession planning less painful and more successful for your family business:

1) Plan early for your succession

Five years in advance of your retirement is an appropriate time period to allow for a successful transition but ten years would be even better. The longer you get to spend on family succession planning, the smoother and more successful the process will be.

2) Consider key questions

In order to set goals you need to ask yourself a number of questions, such as:

Retirement plans
Desire to continue participating in the business – maybe a support or advisory role
Financial needs during retirement
Ability to hand over control of the business – plan other activities to continue to lead a fulfilling life in retirement may help you ‘let go’.
Are there family members not involved but should be benefited?
What are the needs of your spouse?
Is a family succession the best option or would you consider selling?

3) Communicate and involve your family

Involving family members is the best way to begin the succession process. You can then consider their feelings, ambitions and views of everyone concerned. To do this set up formal succession business meeting on a regular basis with an agenda setting the structure.

To help discover expectations, encourage your children or successor to ask questions such as ‘what would a successful succession plan look like to you?’ or ‘what difficulties have you had running the business?’

4) Develop a written succession plan

You need to develop formal processes, procedures and rules as a way of avoiding tensions and conflicts.

A step by step approach with time frames will help deal with all practical elements of the succession process.

The plan needs to include objectives, choosing the successor, leadership and development programme for the successor, the seniors exit plan, successors role and responsibilities and the ownership structure.

5) Chose your successor

Identify the individual who has the necessary skills and experience to drive the business forward. Think what’s best for the business.

The first born child may be the obvious child as the successor but does that child have the right skills or interest to do it? Another family member may be more capable or willing.

If there are no family members capable or interested in taking on the business then you will need to consider your selling options.

6) Development and leadership plan for your successor

Nurturing the next generation often doesn’t come naturally to family business owners and there’s more needed in the transition than just ‘showing them the ropes’. The successor’s development and leadership is vital for a successful smooth transition and a plan will help keep the owner focused.

It’s the parent’s responsibility to ensure the successor is fully equipped to take over the business. The plan should include training them in all business aspects of day to day business:- operations sales, finance, investment, people, suppliers and decision making. Exposing your successor to key individuals, to your customers and to suppliers will ensure the relationships are maintained so transition goes barely unnoticed.

Sharing decision making with the successor will build their confidence and help them to start thinking like an owner.

A structured training, development and leadership plan will also help expose any missing skills or knowledge that a formal training course could provide in addition to parents mentoring.

Regular feedback about the successor performance is essential. Recognition and praise for any achievements or work well done will build confidence and constructive advice where needed will build on improvements.

Allow at least 1 or 2 years of working with your successor before you hand over the business.

7) Ownership of the business

Whilst you have chosen the successor to manage the business, the ownership of the future business may be differently set up.

If you assume family members will always want to remain involved, it's easy to get into a mess with the ownership structure of your business. It's a good idea to design it such that active members formally own shares. This way, retiring family members have to sell their shares to members of the next generation, providing both an orderly transfer of control, and funds for their own retirement. It may be fairer for the successor of have a large share in the business than other non active family members. You could always make other financial arrangements for non active children if necessary.

An annual share redemption programme is another useful tool for streamlining ownership, with a cap on the amount the company can spend on shares in any one year. That way, some family members can remain shareholders, providing liquidity to the company, while others elect to sell their shares, with, over time, the happy effect of pruning the corporate family tree!

Even if family members don't take advantage of the programme, the mere possibility that they could sell their stock gives them a new sense of control. They can then retain their shares, recommit, and engage with the rest of the family in revitalised ownership of the business.

8) Taxes

The minimisation of taxes upon death is another element that needs to be considered in your succession plan. There are asset tax strategies that will help you do this, such as freezing the value of your interest in the company while you transfer ownership to your child/children.

9) Seek help from a professional

Using a trusted business advisor can help take the emotion out of the succession and manage the process successfully.

Select your professional at the early stages of planning ideally five years prior to handing over the reins.

CMC has guided many family businesses through succession over the last 20 years. We use our broad business skills to guide the family, encouraging parents to ‘give’ and children to ‘take’ at the appropriate times in the succession. CMC understand that this is a challenging but exciting time for the family and with emotions running high, defusing conflict is just part of our role. CMC work closely with other professionals such as accountants and lawyers and can bring them into the planning for specific advice such as tax strategies.

To contact us call our senior partner Derek Allen on 01491 829184 or derek.allen@cmc-partners.co.uk