Business Succession Planning: Everything You Need to Know

Effective succession planning for your business legacy

Succession planning is an exciting opportunity to shape the legacy of your hard work. Whether you’re exploring options to sell your business to a third party, transfer ownership to your management team, or pass it on to the next generation, planning ahead can help you achieve the best possible outcome.

What is business succession planning?

Succession planning is all about preparing your business for the future. It’s the process of identifying who will take over when the time comes, whether this is as a result of an exit or due to unforeseen events, such as death or incapacity of a key founder. By planning ahead and having corporate governance documents in place, you can protect your business from disruptions, keep things on track during big changes, and secure its future for everyone involved—whether that’s employees, customers, or family members. It’s not just about the short term; it’s about building a lasting legacy.

Selling a business, especially one that might have been in the family for generations, is a significant decision. It involves more than just financial considerations; it requires thoughtful planning to protect the legacy you’ve built and to ensure a smooth transition. It’s important to arm yourself with as much knowledge as possible and explore all your options to make informed decisions.

Why is it important?

“More than a third (34%) of family business owners say they have no plans to pass over control of their business until they lose capacity or die.”

Early succession planning is essential for keeping your business running smoothly. By preparing for leadership or ownership transitions, you’re not just maintaining stability – you’re building a foundation for long-term success.

Businesses need two things to thrive amid volatility: resilience and agility. The best way to achieve this is by arming yourself with knowledge and preparing as early as possible. Thinking through tax strategies and structuring your business in the right way can make a significant difference when it’s time to sell.

Key documents such as a shareholders’ agreement and articles can set out clearly what should happen to the shares on the occurrence of events such as death, incapacity, a transfer of shares or in the event of major breaches of the terms of such documents or deadlock. They can also provide a trigger for a transfer of an individual shares where they are no longer involved in the business. Working with insurers can provide additional protections where cross options backed by life insurance can cover the value of an individual’s shares in the event of their death or incapacity.

Read more about what happens to shares when you pass away.

A well-thought-out plan brings clarity and confidence. It helps retain top talent, strengthens client trust, and ensures smooth transitions that align with your business goals. Instead of reacting to change, you’ll be prepared to embrace it and stay ahead in a competitive market.

“64% of family business owners say they haven’t created a will to determine what will happen to their business after they die.”

For family businesses, succession planning takes on added significance. Business assets and personal wealth, such as savings, properties, and financial portfolios, are often closely linked and should be looked at as part of the process. This allows for better outcomes, reduces misunderstandings, and helps prevent potential disputes.

Who should be involved in succession planning?

Succession planning isn’t just about preparing for the unexpected, it’s about building resilience and setting your business up for long-term success. Anyone in a key position, no matter the size of the business, plays a vital role in ensuring operations can continue seamlessly during transitions or unforeseen circumstances.

Proactive planning helps businesses thrive even in challenging times. For instance, having clear processes in place for tasks like contractor management or invoice approvals ensures continuity if a key team member is unavailable. By addressing these areas early, you can avoid potential disruptions and keep your business running smoothly.

Options available for succession planning on exit

There are several pathways for business owners to ensure a smooth transition of leadership or ownership while preserving the legacy and value of their company. Here are some of the most common options:

Transferring to a family member

For family-owned businesses, passing ownership to the next generation can be a natural choice to continue the family legacy. However, this option may not always be practical. Adult children may have their own careers or lack the skills and experience required to take over the business. In such cases, alternative succession strategies should be considered to maintain continuity and ensure the business’s future success.

When transferring ownership to family members, it’s essential to explore tax-efficient structures like trusts and inheritance tax planning. These measures can help reduce potential tax burdens and provide a clear framework for ownership transfer, ensuring the smooth continuation of the family legacy.

Management buyout (MBO)

An MBO involves the current management team purchasing the business from its owner. This option allows the management team to take ownership and operate the company independently. This could be an appealing option as the buyers are already familiar with the company’s operations and share its ethos and commitment to any employees. These shared values help protect the business’s legacy while offering the owner greater control over the transition.

A strong management team is critical when transitioning ownership through a management buyout. Buyers need confidence that the team left behind can continue growing the business and maintain operations seamlessly.

MBOs may involve external financing to fund the consideration payable for the company. Alternatively, the vendor may be willing to allow payment on a deferred basis over time avoiding the need for external funders to get involved (VAMBO).

Employee ownership trust (EOT)

Under this structure, a trust purchases a controlling interest in the business on behalf of its employees. The trust holds shares for the long-term benefit of employees, leading to greater engagement and loyalty. Typically this will involve the consideration being payable over a number of years whilst the company generates the cash to make the payments.

Trade sale

Selling to an external buyer, such as a company in the same industry or a related sector, allows the seller to exit the business completely while enabling the acquirer to enhance its market presence or capabilities. We often work on trade sale to UK and International buyers, running a competitive process may assist the seller in maximising the value paid for the company.

Financial investor

Partnering with a financial investor, such as a private equity or venture capital, can provide the business with the capital and expertise needed for growth, while allowing the owner to realise a proportion of the exit value whilst maintaining their involvement and ability to benefit from future growth. This option is particularly appealing for businesses looking to expand or enhance their operations before a full transition. By choosing the right investor, business owners can ensure their vision and values align with those of their new partners, supporting both continuity and future success.

Flotation

Taking the business public through a stock market flotation allows owners to realise their investment while offering the company access to new funding opportunities. This option can raise the business ‘profile and provide a platform for long-term growth. However, it requires careful preparation and a robust business model to attract investors. For those seeking to preserve the company’s legacy, flotation can offer a balance between retaining influence and stepping back over time, as well as diversifying ownership across a wider pool of stakeholders.

Common succession planning challenges and how to overcome them

“Less than half (47%) of family business owners have started succession planning.”

One common challenge when planning for succession is identifying suitable candidates, particularly for leadership or specialist roles. This can be addressed by starting the succession planning process early and investing in the professional development of potential candidates.

Another challenge is resistance to change, which may arise from employees or leaders who are hesitant to discuss future transitions. To overcome this, you should communicate the long-term benefits of succession planning and embed it within your overall strategic framework.

Incentives such as share options or growth shares can be issued to employees or family members to incentivise them to stay and grow the business, as they will then participate in its ultimate success.

Finally, many organisations lack a formal succession plan, which can lead to uncertainty and missed opportunities. Developing a structured, documented plan with clear timelines and responsibilities helps mitigate this issue and ensures a smoother transition process.

Legal readiness is essential for a smooth sale process. Common issues buyers flag includes missing documentation, unsigned customer contracts, or improperly executed share buybacks. Addressing these issues early can prevent red flags that might delay or even derail a deal.

Why do family businesses need a succession plan?

Succession planning is particularly important for family businesses where personal relationships and business interests often overlap. A well-designed plan provides certainty for stakeholders, offering clarity on the future direction of the business. This is essential not only for family members, but also for non-family employees, who need confidence in the organisation’s stability.

A succession plan also allows the next generation of family leaders to develop their skills and transition into leadership roles effectively. Without a clear plan, family businesses risk disputes, confusion, and even financial instability.

“Only 24% of family business owners have either a prenup or post-nup in place for their business.”

A robust succession plan for family businesses should also consider personal assets and legal arrangements, such as wills and trusts, to ensure that business and personal wealth are protected and distributed according to your wishes. Powers of attorney can also provide clarity and continuity in decision-making if unexpected circumstances arise.

By making informed decisions early, businesses can ensure continuity and preserve their legacy for future generations.

Checklist: How to create a business succession plan

• Start early: Begin succession planning well in advance of anticipated transitions. Early planning allows ample time to develop a structured strategy, address challenges, and implement actionable steps, ensuring the organisation can maintain business continuity during leadership or ownership changes.
• Identify critical roles: Pinpoint priority roles essential for the business’s ongoing success, such as leadership or specialist positions. Clearly define the requirements for each role, including necessary skills, qualifications, and experience, to set benchmarks for evaluating potential candidates effectively.
• Document skills and responsibilities: Create detailed profiles for each critical role. Document the skills, knowledge, and responsibilities required to perform these roles successfully, forming a solid foundation for assessing and developing potential successors within or outside the organisation.
• Identify potential successors: Evaluate internal and external candidates for their suitability to fill critical roles. Consider their current capabilities, long-term potential, and alignment with organisational needs, while engaging them to understand their career aspirations and secure their commitment to the process.
• Cultivate employees: Invest in professional development programmes, mentorship opportunities, and tailored training to bridge skill gaps and prepare potential successors for future leadership roles. Cultivating employees ensures readiness and reduces reliance on external talent.
• Identify skill gaps: Assess the gaps between the skills and experience of potential successors and the requirements of priority roles. Develop targeted strategies to overcome these gaps, equipping successors with the capabilities they need to thrive in their new positions.
• Develop an action plan: Create a formal action plan that includes timelines, development goals, and contingency measures. This plan should outline steps for a smooth transition while addressing any challenges that might arise during the process.
• Appoint a successor: Finalise the decision to appoint a successor for each critical role. Set clear timelines for the transition and communicate the decision to all stakeholders, ensuring alignment and minimising potential disruptions.
• Communicate the plan: Share the succession plan with key stakeholders across the organisation. Open communication fosters trust, aligns expectations, and ensures everyone understands their roles and responsibilities within the plan.
• Review and update regularly: Revisit the succession plan periodically to reflect changes in the business, address new challenges, and ensure strategies remain relevant. Regular updates keep the plan dynamic and adaptable to evolving organisational needs.
• Diversify supplier and customer base: Minimise concentration risks by ensuring no single supplier or customer has disproportionate influence over your business. This reduces vulnerabilities and makes the business more resilient to market changes. A diversified base will also be attractive to buyers, who prefer stable and predictable revenue streams.
• Invest in modern IT systems tailored to your business needs: Ensure that your business operates on up-to-date and efficient IT systems. This could include cloud-based solutions for data management, cybersecurity measures, or automated operational software specific to your sector. Streamlined IT infrastructure can improve productivity and provide a competitive edge, making your business more appealing to potential successors or buyers.
• Protect intellectual and tangible assets: Safeguard critical assets such as trademarks, patents, customer databases, and operational technologies. Ensure that intellectual property is properly registered in the company’s name and that tangible assets, such as business premises, are adequately insured and well-maintained. A well-protected asset base gives buyers confidence that they won’t face unexpected costs post-acquisition.
• Include personal interests: Incorporate personal tax planning, wills, and powers of attorney into your strategy to ensure that both personal and business interests are aligned and protected. This can provide clarity and prevent potential disputes during the succession process. After the sale, it’s important to carefully consider how to manage the proceeds. Setting up a family investment company can provide significant tax advantages, allowing for tax-free receipt of dividends and lower corporate tax rates on other income. This can be an effective way to protect and grow your wealth. Our comprehensive tax planning guide covers everything from maximising financial returns and reducing tax burdens, to understanding exemptions and reliefs

Business succession planning: best practices

Effective business succession planning involves adopting best practices that ensure the process is thorough, adaptable, and inclusive.

• Create governance documents – Create a shareholders’ agreement and articles that all shareholders agree to at the outset.
• Be dynamic and adaptable – Regularly review and update the governance documents to reflect changes in shareholders, business goals or circumstances. Consider tax planning, exit timelines and changing business needs.
• Promote open communication – Foster transparency with employees, successors, and stakeholders.
• Eliminate potential risks – Diversify your suppliers and customers to avoid concentration risks, modernise IT systems, and protect your assets, including intellectual property. These steps can significantly enhance buyer confidence.
• Consider the entire workforce – Ensure succession planning isn’t limited to leadership roles but also accounts for other critical positions too. Consider share incentives such as cross option or growth shares for employees and insurance for key workers.
• Involve advisors early – Involving legal and financial advisors early in the process can help identify and address potential issues before they become deal-breakers. This preparation can lead to smoother due diligence and better outcomes during negotiations.

Where to get help with your business succession plan

Planning early for your exit, or making provisions should something unexpected happen, is vital in ensuring your business continues as you intend. Early preparation not only helps create a smooth succession, but it can also reduce tax exposure with the right strategies.

We provide expert legal advice to help you consider all your options from putting in place governance documents and tax structures at the outset, growing the company through acquisitions or natural growth, through to your chosen exit structure.

For family businesses, it’s especially important to address both personal and business assets. We can help with personal tax planning, Wills, cross options and trusts to make sure your assets are allocated according to your wishes. We also assist with setting up powers of attorney to provide clarity and continuity if unexpected circumstances arise.

Whether you’re in the early stages of planning, or refining an existing strategy, we can support you every step of the way. From preparing for leadership transitions to ensuring the transfer of ownership aligns with your goals, we’ll help you create a plan that secures the future of your business and protects its legacy.