Business Succession Planning: Passing the torch to the next generation
Building a business is hard work, but also a very rewarding endeavour, which many individuals see as their life’s work. Many resources, emotions and years are invested into a company, so planning what will become of it when you are no longer around is vital. This is where effective business succession planning can make a huge difference to the outcome.
What is business succession and when does it occur?
Business succession happens when businesses are handed over to the next generation. This can occur when an owner wants to retire, upon the death of a proprietor, or when the owner wants to sell the business. Succession planning is usually associated with retirement, but it also has an important function when something unexpected happens to a business holder. A well-considered business succession plan significantly reduces stress and smoothes the handover process.
There are several options for transferring ownership of your business
- Passing the business onto children / heirs. This is a popular option, especially if it is a family business and the children already work for the company.
- Selling the business to a co-owner. If the company was founded with a partner or partners, considering co-owners as potential successors makes sense.
- Selling the business to a key employee. Sometimes an experienced employee, who knows the running of the business and is respected by the staff, can be a suitable successor.
- Selling to an outside party.When there isn’t an obvious choice for a successor, business owners could consider other entrepreneurs or even a competitor in the community to buy the business for a fair price.
- Selling shares back to the company. This option is available to businesses with multiple owners. When one owner dies, the business can purchase shares from the deceased owner’s estate and give each surviving partner a larger share of the company.
Challenges and potential problems
It is important to plan adequately to ensure a smooth business succession. At Exceed we encourage business owners to see succession planning as necessary and not put it off until it’s too late, thereby mitigating common problems such as the below:
- In family businesses, emotions can run high, especially after an untimely death or disability. There may also be resulting power struggles between siblings which negatively impact the firm.
- Sometimes the current generation wants to hold on to power to the detriment of the next generation.
- The vision is not clearly conveyed and documented while the current administration is there. This leaves the next generation uncertain about many areas and not fully informed of developments, making it challenging to succeed.
- Because of bad planning, many second-generation businesses do not survive a transition, and are eventually sold or are simply closed. Only 30% of companies keep the original name and ownership following an inheritance.
- Often, the company will struggle to operate smoothly during the transition period because of unresolved matters. The structures might not be set up correctly for an easy transition to the next generation.
- Not planning ahead can also cause the business to need to pay higher taxes during the transfer.
How to plan for a smooth and successful transition
Business owners should prepare for a successful transition in advance. Lessen the possibility of chaos and confusion when passing a business onto the next generation with effective succession planning.
- Set up a precise and realistic business succession plan and review it regularly. Include a succession timeline, a list of potential successors, a collection of documents and procedures, your business’s valuation (update frequently) and details of how your succession will be funded.
- Don’t start too late: Timing is essential. Business owners who want to retire should begin writing a succession plan at least 5 years or more before the time. Not planning to retire anytime soon? There are still good reasons such as untimely death or disability to make sure succession plans are in place if required.
- Save money: Planning well in advance can save money in terms of reducing taxes, such as estate duty, or saving on recruitment costs (cheaper when done at an early stage). It is also essential to protect the business assets and keep the cash flow going during the process.
- Make sure the business can keep operating during the transition: Having a well-written succession plan is vital, especially if your business is complex, involves a larger number of people and needs to keep operating in your absence, with as little disruption as possible for your clients.
- Pass on your principles: The transition can also be helped by defining what is important to your family business, how it should act and develop. Pass on the core values of your business. By building sound corporate principles, the next generation can ensure it manages the business properly.
- Choose good leaders: Specify who will be taking over the business in the next generation and how the structure should look moving forward. Be aware of potential friction and changes in family dynamics (in the case of choosing heirs), and plan accordingly. If space is created for the new generation to make their mark, it often takes the business forward.
- Keep the value of the business. Continue to add value for your customers and your family for many years through good succession planning which will ensure the time and effort spent on building your company is retained for future generations.
How can we help?
At Exceed, we are fully equipped to help business owners prepare for this transition and do thorough business succession planning. We can assist with:
- Restructuring, including setting up a new business structure or trust deed updates.
- Facilitating family conversations.
- Assisting in the process of handing over to the heirs / new owners.
Contact us to plan for the future of your business and ensure that it is safely transferred to the next generation.