Maung Aye

By Maung Aye, Joint Managing Partner in our Corporate and Commercial team.

The private sector is facing a crisis of succession. Employing around 14 million people, nearly 86 per cent of all UK businesses are family owned, meaning succession and estate planning are vitally important.

Although many business owners have considered what they will do with their business later in life, plenty have met with stumbling blocks such as the complex legal requirements, the challenge of structuring wealth to avoid excessive taxation, family changes and, most importantly, finding the time.

Succession planning may not seem like a priority for now, but it will inevitably become one in the future. However, it is essential that business owners begin succession planning in plenty of time, in case of unexpected developments for themselves or their planned successors.

This will put business owners in the strongest possible position to shape their own legacy and achieve the transition that they want.

‘What’s in a name’-d successor?

When planning who will succeed them at the helm of their business, founders and business owners must consider a variety of factors.

These include who is willing and able to take on the task, who has had the most involvement with the business until now, who has the aptitude for reflecting the business’ ethos, and whether just one person will be up to the job.

Business owners may decide to leave their shares in a business to one person – perhaps a single child or spouse – or to multiple people, for example, giving each child an equal share.

A succession plan must also include a formally defined process for handing over control of a business, as well as provisions for legally and financially giving successors ownership.

Using this proactive approach, business owners can head off any potential disputes or challenges before they arise – provided their succession plan is communicated effectively to all involved parties.

Collaboration, evaluation, perspective

Why have a succession plan in place? It’s all about progression in the right direction.

Passing on control of a family business to the next generation can be a tough but rewarding decision, bringing in new perspectives in the form of children, grandchildren or even their spouses.

Not only does this allow a founding business owner to pass wealth and security on to the next generation, but it also presents an opportunity for shaping a legacy beyond monetary value.

A long-term succession plan gives business owners the opportunity to collaborate with their successors to decide on the upcoming direction of the business and agree on its ethos going forward.

With a solid plan in place, successors inherit more than a successful business; they assume a shared vision, a direction, and a thorough understanding of their responsibilities.

When the successor takes over

Succession planning is also vital for the successor. There are a number of things to consider when taking over a family-owned business. It is possible that, as with most inherited assets, Inheritance tax may be applicable to the business.  In order to ascertain the position, successors to a business will need to determine the value of the shares, or of the whole business, for Inheritance Tax purposes, even if the original owner is still living when the inheritance was received.

Successors will need to know whether the business is a trading company and whether it is listed or unlisted. They will also need to know the total business assets and their assets in order to report this to HM Revenue & Customs (HMRC) and pay the correct amount of IHT if applicable.

Business owners really see the value of planning here, as they can bring their successor on board prior to stepping back from day-to-day operations.

As we can see, the most unpleasant of the succession planning questions is also the most critical: what happens if a business leader passes away or loses capacity?

Without a directive to appoint a new business owner, surviving owners may lose control of part or all of the business. Or else, shares in the business may pass to a family member who will not act in the best interests of clients and other stakeholders.

In a similar vein, a business owner may appoint someone to make decisions on their behalf if they lose capacity through a Lasting Power of Attorney (LPA). With sufficient forward planning, individuals may even leave instructions as to what will happen within their business, should they lose capacity.

This may or may not be a permanent loss of capacity. Whatever the situation, an LPA offers some sense of consistency and surety to employees, clients and dependents.

At a time of intense emotion, a destabilised business can cause undue difficulty that can be avoided with advance succession planning.

Estate planning and Wills specialist [NAME] at Mackrell Solicitors offered further insight into the complexities of planning for the future and business ownership.

“The law surrounding passing on a business in a Will or during someone’s life is complex.

“One of the things that makes it much easier for everyone involved is making important decisions as early as possible and seeking support to see things from all angles.

“We’d look to help minimise IHT liabilities and nasty surprises in the event that a business owner suddenly dies or loses capacity to make decisions. This is why we always look to work with business owners and their successors, as keeping all parties in isolation can lead to poor communication and something important being missed.”

Preparing for the future

No man is an island. This is nowhere more evident than for business owners, who may struggle to achieve a smooth succession without preparing family members for their individual roles.

The key to preparing successors to take over a business is to instil confidence in them and their ability to lead and make sustainable decisions.

Introducing your successors to key stakeholders and management staff is crucial to avoid a crisis of confidence, which would weaken your successors’ positions within the business and affect growth and investment opportunities.

Also integral to the identity of your brand is ensuring that your successors have the right skills to run the business. Do they understand its ethos? Do they know its suppliers? Have they seen its daily operations? Ask yourself all this and be sure to address all doubts well in advance of the succession itself.

Securing the future, today

A comprehensive succession and estate plan for business owners comes down to ensuring the continuation of a shared vision while welcoming new perspectives and avoiding legal challenges or financial losses.

Achieving this involves a significant investment of time and consideration. However, making a considered, informed decision can prevent potentially disastrous oversights and unforeseen consequences of leaving a business in the wrong hands.

The importance of seeking professional legal and business advice throughout the succession planning process cannot be overstated. A solicitor will be able to offer advice at every stage, from choosing successors to signing over ownership.

Many business owners do not want to think about what will happen when they are ready to take a step back, but it is essential that individuals act early, before a crisis comes their way.

In doing so, business owners can secure a material legacy that reflects their vision for the business and pass on as large a financial benefit as possible to family and loved ones. A clearly defined succession plan leaves the business and successive directors in no doubt as to what is coming next.

Speak to our Joint Managing Partner, Maung Aye, by emailing or calling 44 (0) 20 7240 0521.