Succession Planning: Securing Your Family Business’s Future

Failure to implement a succession plan is one of the main reasons why so few family businesses survive, future generations.  The combination of the evolving volatile economic implications of the Ukraine War, post recent UK and USA elections and post Brexit, alongside recent changes introduced by the UK Budget in October 2024 have added further importance to the need to carry out effective pro-active succession planning for family businesses.  The best way to secure a family business’ future, is to look after the business, because if you look after the family business, it will look after the family through the generations, writes Feargal McCormack, Head of AAB Family Business Sector Team.

The UK’s recent Budget in October 2024 has sent ripples through many family businesses and the agriculture industry with fundamental changes to Business Property Relief (BPR) and Agricultural Property Relief (APR) which significantly impact how family businesses and farms would be passed down through generations.  For decades, these reliefs have enabled business owners and farming families to transfer assets and land upon the owners death, without incurring inheritance tax. Now with these protections stripped back, ensuring the continuity of a family business or farm now requires a proactive approach to succession planning, facilitated by a Succession Facilitator and incorporating strategic leadership, finance, legal and tax expertise to navigate the complexities ahead.

The transfer of power from one generation to the next is one of the most emotionally fascinating challenges facing family businesses.  The evidence clearly demonstrates that delaying or poorly planning this transition can create havoc for a business in both the short and longer term.  A key question for business owners is to reconcile individual and family aspirations with the commercial goals of the business.

At a high level, there are four key issues to be addressed by the current owners: whether they think it is better to sell the business, divide it up, transfer it in whole or in part to the next generation, or bring in non-family professional management to run the business, retaining ownership in the family.  It also has to be acknowledged that it is not always easy to divide up a business and for the business to remain commercially sustainable.

The overriding characteristic that distinguishes most family businesses is a unique atmosphere which creates a sense of belonging and an enhanced common purpose among the whole workforce.  Although intangible, this factor manifests itself in a number of very concrete and positive attributes that can serve to give family businesses a significant competitive edge which ultimately supports research, that over time, family owned companies, outperform public companies.

There are a number of key challenges for family business succession and continuity.  At the outset, it must be acknowledged you want to be able to control events and do not want events to control you.  In order to do this, business owners need to plan early for succession.  Succession is a process and not an event, and it is important to ensure that management structures, financial discipline and information systems are fit for purpose and the current owners need to ensure there is a sound business to hand over to the next generation.

The best way to facilitate strong business continuity and succession, is to make sure that the business is ready for sale, even if you never sell it.  On average, it can take up to three years to get a business ready for sale.  Thus, in terms of succession planning, it is really important to ensure that the culture of the business is all about encouraging best business practices and an open growth mindset to ensure smart working and commercial sustainability.

Working smarter will incorporate creating an adequate high performance culture of competitiveness, utilising innovation, technology, data analytics and flexible work practices and opting for solutions that emphasise health and safety while reducing carbon emissions.  Commercial sustainability will mean promoting a culture of resilience, embracing disruption, aggressive growth, lean processes (reduce waste and continuous improvement) and future proofing the business by transforming the organisation to create a ‘better norm’, and satisfying today’s needs without endangering future generations.

In terms of succession planning, a key consideration includes independent financial security for current family owner(s).  In our experience, many owners in fact neglect their personal finances and wealth management.  People who own successful enterprises often tend to believe that the business itself represents their best personal nest egg, and it would guarantee their financial security when the time comes for them to step down.  This can be a major mistake due to unforeseen circumstances.  There are two schools of thought on the best way for business owners to engineer financial security and these are; ongoing cash withdrawal or building up balance sheet in restructuring.  We strongly recommend a combination of both methods with a greater emphasis on regular ongoing cash withdrawals to avoid placing all your eggs in one basket.

At times, there is a common misconception that the oldest child should take over as Managing Director and this is not always the case and should never be assumed.  Equally, another concept is that all children should have equal shareholdings.  Again, this should not be assumed.

From a UK tax perspective, there are two taxes which need to be given consideration, namely Capital Gains Tax and Inheritance Tax.  The introduction of the tighter inheritance tax rules in the UK October 2024 Budget, means that without proper planning, substantial tax bills could result in forced sales of business assets or land, potentially dismantling multi-generational family businesses.  From April 2026, the first £1million of combined businesses and agricultural assets will remain exempt from inheritance tax, but any amount exceeding this threshold will be taxed at 50% of the full rate (equating to an effective rate of 20%).  The nil rate band of £325,000 will remain unchanged until at least 2030.  This represents a stark contrast to the previous system, and the reality is, that without careful planning, the next generation could face unmanageable tax bills that threaten their ability to continue operating the business into the future.

The most important thing is to choose the right people for the right job and also in terms of ownership structures, which is best for the business.  Such a consideration must also give due recognition to all the stakeholders in a family business and there are a number of clear distinct stakeholders in a family business including; diverse family members, non-family employees, family investors and sometimes non-family investors.  It is very important in terms of creating a succession continuity plan that all these stakeholders are considered as part of the solution.

Personally, I have found that combining business and family assets via a Statement of Affairs for the senior generation and a Family Agreement, is the best way to facilitate the transfer of family and business assets to the next generation.  The most successful family business succession transitions are those that result from establishing a partnership with the next generation, based on mutual responsibility, respect and commitment.

The main elements in a family transition partnership are summarised below:

• Start the planning early;
• Statement of Affairs – both business and non-business assets of the senior generation;
• Encourage intergenerational teamwork;
• Consider the various stakeholders involved in the family and the family business;
• Develop a written succession plan e.g. a Family Agreement, which is not a legal document but is an overall framework document which may facilitate Shareholders Agreements, Partnership Agreements, Directors Service Agreements etc. which are legal documents;
• Take advantage of outside help (utilise a Succession Facilitator);
• From a business and family perspective, to treat all children ‘fairly’ and to provide clarity and remove uncertainty to enhance the future viability of the younger generation and indeed, their families;
• Consider tax implications of proposed solutions; and
• Embrace the future for key management in the business.

In our experience, it is best to address the transfer of family business assets and business assets when the senior generation are in good health and in this context, address issues which will minimise opportunities for a family dispute going forward.  Personally, I believe it is very sad when the senior generation do not take responsibility for trying to resolve the succession issue when they are in good health and fudge it, and leave it to the next generation, as in my experience when this happens, it is far more difficult to resolve.

We work with family businesses to help them create the balance between family and business needs, derisking and maximising family wealth, planning for succession, implementing governance frameworks alongside policies and procedures.  The objective is to help family business owners discover the peace of mind, knowing their family’ wealth is protected, and preserved for the benefit of future generations.

If you have any queries please do not hesitate to get in contact with Feargal McCormack, Head of Family Business.