Succession planning is an inevitable consideration for every business owner, no matter the size or industry of the business. Eventually, every leader will face the reality that they won’t stay in their current role forever. Even if the business was founded by the owner, there will come a time when planning for an exit becomes necessary.
Recent changes to the inheritance tax treatment of privately owned trading businesses make such planning more important than ever since it may longer be possible to pass the business to the next generation free of inheritance tax.
Whether the plan is to retire, transition the business to a new generation, or sell, succession planning is essential to ensure the continuity and future success of the business.
This article explores the practical aspects of succession planning and how to approach the process effectively.
Why Succession Planning Should Start Early
One of the most important pieces of advice for business owners is that succession planning should never be left until the last minute. While the daily operations of running a business often take precedence, putting off succession planning can lead to unforeseen challenges when the time for transition arrives. The key to smooth succession is to start early - preferably years before the intended exit. According to the International Accounting Bulletin (February 2024), while 30% of UK businesses recognise the importance of succession planning, only 10% have integrated it into their overall business strategy.
The reluctance to engage in succession planning often stems from both practical and emotional factors, such as fear of relinquishing control or uncertainty about the future. However, a business cannot achieve long-term sustainability unless it plans for leadership transitions.
Creating An Options Report: A Roadmap To Succession
A critical first step in effective succession planning is the creation of an ‘Options Report’. This report provides a comprehensive analysis of the business and helps owners identify and prepare for potential succession paths. While the process may seem daunting at first, working with experts to develop an in-depth analysis can make the task manageable and more strategic.
What does an options report include?
The ‘Options Report’ typically includes a deep dive into various aspects of the business to formulate strategic recommendations for succession. Key components include:
Leadership assessment: Identifying the strengths, skills, and competencies of the current leadership team while pinpointing any gaps that need to be addressed.
Succession risks: Evaluating potential risks associated with leadership transition, such as the age of current leadership and the availability of successors.
Talent pool analysis: A thorough review of the internal talent pool to determine if there are candidates ready to step into leadership roles.
Leadership development strategies: Creating strategies to nurture and develop future leaders, including mentoring and training programs.
Market and industry trends: Understanding market trends and industry shifts that may impact the business and influence succession decisions.
Succession roadmap: A clear timeline outlining key milestones and actions to ensure a smooth leadership transition.
Comparison of succession options: Evaluating different succession options, such as selling to a third party or family transition, and their potential impact on the business's future and valuation.
An ‘Options Report’ not only prepares the business for succession but also provides the clarity needed to determine the business's current value. Understanding the business's worth and whether it aligns with the owner’s personal goals, can inform the decision-making process when the time comes to exit. Additionally, the report may identify areas for potential growth that can increase the business's value before sale or transition.
The Impact Of External Factors On Succession Planning
External factors can influence the planning process, making it even more essential to have a well-established strategy in place. For example, recent changes in tax laws, such as the increase in capital gains tax rates, adjustments to business asset disposal relief and changes to the inheritance tax treatment of private trading businesses in the 2024 budget, can impact the succession process.
A robust succession plan can help the business respond to these changes more effectively, ensuring the business is agile and can adapt to external shifts.
Starting Early
Succession planning is not an event, but a process that requires time, careful consideration, and proactive steps. By starting early and crafting a comprehensive ‘Options Report’, business owners can ensure they are prepared for a smooth transition, regardless of the path they choose.
Whether the plan is to hand over the business to family, sell to a third party, or transition to a new leader, the goal is to preserve the value and continuity of the business for the long term.
About the Author - Should you require assistance or support in any aspect of structural, governance or succession planning for your family business, the team at Buckles can offer impartial, experienced guidance on all aspects of ownership transferal. Contact them via their website to discuss the options available.
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