Often described as the backbone of the UK’s economy, small businesses, and in particular family businesses, add some £1.1 trillion to the UK economy every year – accounting for 2 out of 3 companies operating in the private sector.
It is quite concerning therefore to come across headlines referring to the ‘crisis’ being faced by family businesses. According to a survey in 2014, only 10 per cent of family businesses said they had any governance structure or succession plans in place. Research from PwC confirmed these findings in their own research which reported that only 12 per cent of family businesses make it to the third generation, and only 1 per cent make it beyond the fifth.
Here we take a look at the 5 questions any business owner should ask themselves in relation to their future and succession planning.
Who? When you step down, who do you want to take over the business you might have spent your entire working life building? Are they capable of doing it? Do they have the skills, finance and character required? Choosing the right successor is key to the future success of the business and so it is important to take time to consider all the potential candidates. Don’t feel pressured into choosing a family member if you don’t think they’re up to the job. Might there be a strong candidate in your senior management team? Ultimately, the wrong successor could impact on your future earnings and might spell the end of the business.
What? What exactly is it that you’re handing down? Is it the entire business or just some of it? Would you like to retain key assets like buildings or intellectual property to give yourself rental or licence income once you no longer own the business? Is the business ready to be passed on or do you need to do some housekeeping first? Getting the business in the right state really helps in securing the success of the transition.
Why? Why are you passing on the business? What are your aims? Is it to preserve the family business or maybe just to retire and focus on your free time? The reasons for passing on the business can dictate the nature of the deal you choose to do and so it is important to have these clear in your mind before you start making any plans.
When? When is the right time to step down? Are you ready to release the reigns? Do you have children who would be interested but aren’t yet ready to take on the business? Even if the right time is “not yet”, it is never too early to start planning. Then you can take as much time as you need to consider all your options, take the advice and make the decision that is best for you.
How? The answers to the previous questions will dictate the structure of any transfer of the business. There are a myriad of choices available to you and what suits you and your business will depend on a number of factors. For example, a straight forward share sale with a full market value being paid up front won’t necessarily suit a deal between close family members where you plan to stay involved in the business on a day to day basis. Likewise, an earn-out structure where your income is dictated by the performance of the business once you’ve stepped down won’t necessarily be appropriate where you’re walking away and hoping for a clean break.
The key message is to think, think, then think some more. Speak to both your accountant and solicitor and do your research. For advice from our team of corporate law solicitors on putting your business’ succession plans in place, please contact us here.