5 Practical Tips for Ensuring A Smooth Succession for Your Business
When you run your own business, you no doubt put everything into it to make it work. That’s why, when you decide it’s time to move on, you’ll want to make sure everything is in order and that it’s moving into good hands – after all, you don’t want all that hard work to go to waste.
Being a business owner can have a big impact on your personal affairs, including your Will and Estate Planning. If you become too ill to work or die while you’re still running the business, you and your family may find yourselves at risk of not being able to access your earnings or being exposed to unnecessary taxation.
As a result, whether you’re intending to keep your business in the family, sell your stake to your business partners, or just sell to a brand-new buyer, there are plenty of decisions for you to make.
You may also have considerations such as ringfencing and protecting your wealth for your family from third party threats and Inheritance Tax (IHT), as well as ensuring continuity in operations.
Here are five practical tips for ensuring a smooth succession for your business.
1. Start Succession Planning Early
As there’s so much to think about, it’s often best to start Succession Planning as soon as possible.
A good estimate for when you should have started planning by is three to five years before you intend to leave the business. You could start planning earlier than this if you like; there’s no way to start too early, as any preparation you do will still be useful down the line.
Build your Succession Planning into how you run the business during this period, too. For example, if someone in a management position exits the business, plan your hiring process around finding someone who’ll be able to perform those same responsibilities in your absence.
You could also give more responsibilities to key members of staff you plan to promote internally in the business when you leave. That way, you can see whether they can manage the role on a day-to-day basis.
You could consider getting a valuation of the business by your accountant in these early stages, too. An independent valuation adds credibility to your sale.
A financial planner is especially useful here, as they’ll be able to tell you how much is “enough” for you to retire if that’s your plan.
For example, you may receive an offer of £1 million, but think you should hold out for £2 million. A financial planner can tell you whether that £1 million offer is enough for you to retire on, making it a better plan than holding out for an offer that may not come.
2. Consider Your Future Position Within the Business
Just because you’re Succession Planning for a time when you no longer own the business, it doesn’t mean you can’t be involved in some capacity.
Decide whether you want to retain some control over the business, such as remaining on the board or keeping your stake within it.
If you do choose to remain involved in some capacity, make sure you create infrastructures that secure the future of the business. Having protections such as Business Lasting Powers of Attorney (BLPA) is sensible to ensure that someone can make business decisions on your behalf in the event that you cannot do so independently.
Bear in mind, choosing to continue within the business could have implications for everyday operations or the value of the business if you suddenly pass away.
That’s why it’s so important to have the infrastructures in place that will keep the business operating should something unexpectedly happen to you.
3. Decide on How You See the Future of The Business
As the business owner, you’ll likely have full control over who will be taking over the business when you step down. That means you get to decide how you want to do this and what you’re looking for in your successor.
Perhaps you want to pass on the business to someone in your family, such as one of your children? Or, is there a key member of staff you always envisaged giving the reins to? You may even prefer to choose an outside buyer who’s been entirely independent from the business until now.
Depending on what you choose, this could have lasting impacts on the business’s continuity. Choosing someone already involved in the business could help provide a smoother transition. Conversely, it may mean you don’t make as much money as you might if you sold to an independent buyer.
If you’re selling to an outside buyer, make sure you consider what you’re looking for: do you want someone who shares your values and vision for the business? Or just the person willing to offer the most money? Make sure you include factors like this in your decision.
4. Look at Strategies for Preserving Your Wealth
Selling a business can come with a range of tax considerations, including IHT and Capital Gains Tax (CGT). Fortunately, there are strategies you can consider for mitigating a potential tax bill.
For example, you could apply for Business Asset Disposal Relief (BADR), formerly known as “Entrepreneur’s Relief”, to reduce the amount of CGT you owe.
As long as you’ve owned the business for at least two years, BADR can reduce your CGT rate on qualifying business assets to 10%, up to a lifetime threshold of £1 million. This can be useful if you want to entirely dismantle the business and give the proceeds directly to your family.
Alternatively, if you own shares in your business, you could consider Business Property Relief (BPR).
BPR allows you to transfer shares you own in your business to your family without incurring any IHT, provided that you’ve owned the shares for two years or more, and they are not listed on any stock exchange other than the Alternative Investment Market (AIM). Using a business trust can also protect this investment for your family and future generations.
BADR and BPR may require you to meet other criteria to qualify and may have limitations that could make you ineligible. Please speak to us for more information on how either of these tax reliefs could help you.
You may be able to further reduce a potential IHT bill too, making use of tax allowances and exemptions that limit the amount of tax you owe.
Tax planning is essential to ensure that you and your family hold on to as much of your hard-earned wealth as possible. However, tax can be complicated, so it may be best to speak to a professional first.
5. Speak to an Experienced Estate Planner
The most important thing to do to ensure a smooth succession for your business is to speak to an expert.
At Strathmore, we have years of experience helping business owners just like you. We specialise in helping people safeguard their business and wealth for them and their families.
We can create flexible frameworks for your stake in a business, or capital from the sale of shares, and protect your wealth from third party claims from individuals who think they’re entitled to your money.
We can also take a look at your tax situation and find strategies to help minimise the impact tax rules could have on your wealth.
Get in Touch
If you’d like to know more about how we could help you with Succession Planning for your business, please email email@example.com or call 01708 923 303 to speak to us.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.
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