Owners of business often think about when they might retire but few have a plan in place to enable a successful exit. Many small and medium sized businesses without succession plans fail when owners retire or become ill as a successor has not been identified or been adequately developed into the role.
Succession planning can be difficult but there are many options available to business owners:
• Transfer the business to a family member;
• Sell the business to a Partner, Management team or employee;
• Sell the business to a third party; or
• Conduct an orderly wind down of the business.
However, before you begin your succession plan it is important that you consider your personal, business and financial objectives for the future. For example;
• When are you planning to retire or exit the business?
• Do you want to remain involved in the business in the future in a high-level role?
• Do you want the business to remain within the family?
• What are your financial return expectations for your retirement/exit?
The answers to these questions should form the basis of your succession plan.
Identifying a successor
In order to identify a successor, you should consider the strategic plans for the business and then identify the skills that are required to successfully implement these plans. Is there someone within the business with these skills or someone who has the potential to develop with appropriate training? If not, then you may consider recruiting externally. These can be difficult decisions particularly where children work within the family business or there are long serving employees who may assume that they will have a key role in the business in the future.
Issues can also arise where a potential successor’s career aspirations differ to your plans for them. It is important to have honest conversations with potential successors to make sure that you have a similar vision and understanding.
Many business owners have grown their business from inception and have built up a vast amount of expertise. Often, this knowledge is not transferred to others within the business and owners find it hard to let go and allow others to take on additional roles. In order for a business to survive once an owner retires, it is essential for their expertise and skills and relationships to be transferred to the successors. This is not something that can be done over a matter of months, successors must work alongside the owners for a significant period of time to truly understand the mechanics of the business and realise it’s potential.
Once a successor is in place, appropriate compensation packages can ensure their long-term commitment to the business. There are many options that can be considered including directorships, share options or deferred compensation.
But what if you want to sell your business?
It is essential for owners to prepare their business for sale so that they receive the best price possible.
Potential purchasers will consider the historical and potential future profits of the business so it is important to review processes, people and systems to ensure the business is operating efficiently and identify areas where improvements can be made. It can take time to implement changes and realise the rewards of these efficiencies so it is important to consider this a number of years prior to a sale.
In many businesses, the owner is key to the business. Owners often hold key relationships with customers and suppliers and therefore the profitability of the business can be dependent on the owner remaining in the business. This is a deterrent for potential purchasers as the most valuable asset in the business is effectively the owner. It is therefore essential to develop a team that can successfully operate the business without the requirement for the day-to-day involvement of the owner. This can be done by providing employees with the training and skills to allow them to carry out roles that would typically been carried out by the owner. Another aspect of this can be the implementation of appropriate systems to reduce the reliance on key individuals.
Finally, if you are aware of anything that would potentially stop a buyer from purchasing the business – fix it!
Many owners decide to sell their business without any preparation and as a result do not receive any interest or are offered a price considerably less than they had expected. This is often due to the issues described above. In order to maximise the sale value of their business, owners should begin preparing for sale as soon as possible.
While each case is different, the overall tax strategy should be to retain as much of the wealth as possible for future generations.
It is important for owners to consider the tax implications of their exit strategy. What is most tax efficient way of exiting the business? On the sale of the business, you may be eligible for Entrepreneurs relief, with tax due at 10% rate, or alternatively pay Capital Gains Tax at 20% on the proceeds.
When monies are received from a sale of business, consideration should be given to the Inheritance Tax implications, ensuring that a tax efficient strategy is implemented.
Regardless of whether you wish to sell your business or appoint a successor, the key to a successful transition is early planning! If you would like any further information on how to plan for succession, please get in touch.
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Whilst every effort has been made by CavanaghKelly to ensure the accuracy of the information here, it cannot be guaranteed and neither CavanaghKelly nor any related entity shall have liability to any person who relies on the information herein. Information given here is for guidance only. Detailed professional advice should be taken before acting on any information contained herein. If having read the guidance here, you would like to discuss further; a member of our team would be pleased to help you.