Passing a business to a successor
You may intend to pass your business on to someone you know, rather than closing it or selling it on the open market. Having a documented plan for successors to take over your business is critically important. This guide will explain the different types of succession and how to prepare a formal succession plan.
Having a formal succession plan will:
- ensure that you and your employees are prepared for change
- provide a 'how to' guide for someone else to run your business
- ensure a smooth and fast transfer of ownership and control
- minimise disruption to business operations.
A succession plan is also useful if someone has to step in if you're unexpectedly unable to fulfill your role.
Follow these 4 steps for successful succession planning.
Step 1: Choose a successor
Business owners who've invested many years to grow their business often prefer to pass it on to someone they know, either as a gift or through sale. This successor could be a family member, employee, business partner or an external buyer they already know.
You still need a documented succession plan even if you're passing your business to someone familiar with your business and operations, such as a long-term employee or business partner. This will ensure everyone knows their roles and responsibilities and the timelines involved.
This is the most important step, so take the time to do it right.
Deciding to pass your business on to a family member is not necessarily a simple process. For example:
- you might want to pass the business on to a family member who doesn't have the necessary interest or commitment to run the business
- more than 1 family member might be interested in taking over the business. This may create conflict in your family.
There are 3 ways you can try to address potential problems.
Mediation
Mediation is a process where an independent person helps people who disagree to come to a mutually acceptable agreement. Mediation ensures everyone has the best opportunity to put forward their objectives and concerns. It can be very beneficial throughout the negotiations and development of your succession plan.
Many professional service providers offer mediation in addition to the legal, financial or consultancy services they deliver.
The steps in the mediation process are normally:
- A mediator (who is not known to either party) listens to each party separately to clarify what they want.
- The mediator brings both parties together to discuss the issues.
- The mediator then leads the parties to negotiate their requirements and make compromises to arrive at an outcome that's satisfactory to both parties.
- When the parties reach an agreement, this agreement is documented and often formalised in a legally binding contract.
Trial periods
You could also offer each party a trial period. During this trial period, they can work across all areas of the business to determine their interest and suitability.
Shared succession
You may also be able to negotiate a plan where the interested family members could work side by side when taking ownership of the business. This will only work well if they have clearly defined roles and responsibilities.
Tips for a successful handover to family members
- Make sure your successors have the necessary skills and commitment.
- Keep in mind the best outcome for the business.
- Ensure open communication and transparency.
- Include family and key staff in decision-making about future management and ownership. Their feedback and engagement are essential.
- Regularly review your plans with the involved family members to make sure they're aware of, and happy with, the progress.
- Develop a process for preventing and resolving disputes.
- Family businesses can be emotional environments. A trusted outsider such as a lawyer, accountant or family business adviser can help provide an objective opinion.
Selling your business to an employee or management team is known as management buyout.
Advantages
- They already know your business's strengths, weakness, opportunities and culture.
- They hold current relationships with suppliers, customers and other stakeholders.
- You don't need to disclose confidential information to an unknown external buyer.
- They're more likely to keep the business as-is (possibly with minor improvements and innovative changes) rather than completely restructuring the business model.
Disadvantages
- They may be less willing to pay your asking price as they might feel they've helped to build the business.
- They may be less likely to secure the full finance for purchase price and working capital.
- If the sale falls through, your relationship may become strained.
Ask yourself...
Succession planning requires you to decide how you will transfer:
- legal ownership
- operational management.
Consider the following:
- Will you transfer both ownership and management to your successor?
- If you're passing it on to more than 1 family member, will ownership be equal?
- Will the management team include non-family members?
- Do you need to change the business goals and long-term objectives?
- How will you measure the success of the succession process?
- Which family members will actively be involved in the business? What will their roles and responsibilities be?
- Will any family members have non-active ownership?
- Does your successor need training or mentoring?
- Do you want to be involved in the business in future (e.g. as a paid adviser or consultant) after you've transferred ownership?
Legal and financial and issues
Regardless of who you choose as your successor, think about the legal and financial implications and include these in your succession plan.
- If it's family, do you intend to gift them your business or sell it to them?
- Do you need to set up a trust as part of the succession? Forming a family trust to own and operate the business on behalf of your children will have tax implications.
- If you're selling your business to a family member, will you get the market value? Getting a professional valuation will give you confidence to negotiate a fair price with your family and will help to avoid disputes.
- If you prefer to receive a regular dividend from the business rather than a lump sum payout, you need to be confident that your successor will be able to run the business profitably enough to make your payments.
Get professional legal and financial advice before selling your business.
Step 2: Value your business
Whether you're selling or gifting your business to a family member or non-family successor, a professional valuation will:
- give you confidence to negotiate a fair price
- help to avoid disputes.
Learn about valuing your business.
Step 3: Document your succession plan
Succession plan template
Our succession plan template can help you set out all the important considerations of the succession process, including:
- legal and financial issues
- operational strategies
- timelines
- stakeholders roles and responsibilities.
Download and complete the succession plan template.
Implementing your succession plan
To successfully implement your succession plan set clear and realistic timelines for:
- identifying and agreeing on a successor
- delivering back-of-house paperwork to meet legal and financial requirements
- training your successor
- transferring responsibilities to your successor. This is usually staged over 3-6 months. This legal and financial compliance requirements are the same as when selling a business
- final handover.
Keep your succession plan current
Many things can happen before and during the handover period, so it's important to keep the documented succession plan updated.
Step 4: Final handover
Following the above steps will help to make the final handover as easy as possible.
It should:
- help your clients and suppliers to continue their ongoing relationships with the business
- support the future success of the business.
Prepare for life after the handover
The months after leaving the business can be personally challenging. It can be hard to adjust to no longer having to deal with the daily operation of a business and having time on your hands.
Small business owners can often experience mental health challenges after leaving their business. It's very important to:
- talk openly to your family, friends and support network
- seek professional counselling if you find it hard to adjust to this new phase in your life.