Succession Planning: Don't Leave It Too Late

Succession planning is important to ensure that a business can continue beyond the departure of the current owners. It can also build value in the business, given that business sales can often coincide with retirement and the proceeds can provide for a financially secure retirement.

Without succession planning, if something happens to the current owners (e.g. in the event that the current owners are incapacitated) it could be a disaster for the business

Succession planning in business is often left far too late in the day by many business owners as a result of:

• A lack of time and the need to focus on the current needs of the business;
• A desire not to incur costs; or
• Sticking their heads in the sand and not wishing to accept the inevitable i.e. one day they may either need to or want to retire!

Companies should ideally think about succession planning from day one. If not, around three to five years before a planned exit at the latest. Spending some time and effort on succession planning at an early stage, well ahead of a planned exit, can help business owners to:

• Identify potential purchasers
• Implement a long term succession plan with existing staff (who may indeed be potential purchasers)
• Maximise the returns they can achieve on an exit
• Identify any potential obstacles to a sale
• Structure the business in the most tax efficient way possible with a view to a future exit
• Avoid a ‘fire sale’ in the event of a need to exit from the business as a result of a change of circumstances (e.g. ill health)

The more pro-active an approach you take at an early stage the greater the chance that you will be able to realise the best value possible on a sale.

Business owners should as part of this process:

• Undertake an objective review of their businesses’ strengths and weaknesses – can anything be done to build on existing strengths or eliminate any potential issues?
• Implement a review of the business structure with their professional advisers – for example ensuring that the business is structured so that there are no bars to claiming Entrepreneur’s Relief on the sale proceeds
• Ensure that key members of staff are tied into the business with robust contracts of employment
• Ensure that contractual arrangements with key customers and suppliers are appropriately documented
• Decide upon a realistic timeline for an exit

Other mistakes I  commonly witness include not putting in place a self sufficient management structure, not consulting advisers soon enough and unrealistic expectations in terms of the time it takes to plan and the basis on which the owner may be able to exit.

My tops tips to ensure a smooth succession would be to:

• Plan early
• Consult with your advisers sooner rather than later
• Identify people within your business who may be potential successors and develop them
• Identify who potential purchasers may be
• Be realistic

It is important to take charge, don't leave it until the last minute when you may be forced to sell on terms which are not acceptable to you - a distressed sale is the worst outcome.

Michael is a Partner and the head of the Corporate team and the Commercial Services Practice Group at JCP Solicitors.

With over 14 years experience of Corporate and Commercial transactions Michael has built up a portfolio of business clients who come from all over England and Wales (and as far afield as Canada and Saudi Arabia) for his expertise. His particular area of specialism is buying and selling businesses and he regularly holds workshops and writes articles on the subject.