With January being the time for New Year’s resolutions, it is the perfect period to get your business and personal affairs in order. When preparations for the year ahead are being considered, many longstanding family business owners are considering their exit and succession options, particularly if retirement is on the horizon. Duncan James, head of family business at law firm Shakespeare Martineau, discusses why in-depth analysis of what the business truly needs should come before anyone is tipped to take on leadership and owners shouldn’t feel forced into making a decision that doesn’t have the business’ best interests at heart.
Owners must work out what their main objective is. This could include protecting the family, protecting the business or enhancing its growth, and from there, appropriate succession decisions can be made. It may even be that outsider input is what’s needed for the business to realise its growth ambitions.
If there is no clear path to succession and no one within the family is tipped to take on the businesses, alternative exit routes can also be explored to ensure that the business legacy, culture and ethos are maintained. Making the transition to employee ownership is a viable option, but can take some time. It enables owners to realise value in a tax-efficient way, whilst preserving business continuity and ensuring there is a motivating structure for managers and staff going forward.
However, some business owners prefer not to have a clean break. Withdrawing from the operational side, but retaining property as a long-term family investment, can help give exiting owners more financial security in the long term while transferring ownership and the stresses of running the business to the existing management team. Additionally, a business owner could retain some intellectual property rights for example, which would allow them to generate income from royalty payments in the future.
With prior planning, family businesses can also use ‘outsider’ input to their advantage, while protecting the fortunes of the company in the process. Using external experts is often a practical, logical and common sense move to inject much-needed relevant sector or management expertise which may be currently lacking. Understandably, owners can be reluctant to let outsiders into the fold for fear of losing financial control however, share options can be put in place to ring-fence finances or separate out the value of the business into capital ‘before’ and ‘after’ a new member joins. As a result, the new addition will take their share from the new wealth that they create, rather than what already exists.
For some owners, there will be a clear choice of successor within the family and takeover intentions should be communicated from an early stage with the individual. To ensure commitment, tying in key family members or other highly-valued managers can help to secure the long-term future of the business. Putting in place a rewarding pay and remuneration package, which comprises an option to assume ownership of a stake in the business, or to assume control of part of the business once key milestones are achieved can also help to keep future successors interested and motivated.
When considering succession for the first time, there can be a tendency for business owners to want to keep the business in the family, regardless of whether it is making a profit or whether family members want a role in its future. The New Year could be the right time for the owner to take a step back and think about what they really want to achieve. If the main goal is to protect wealth for the family to benefit from in the future, then a disposal or transfer of ownership could be the best approach.
Duncan James is a partner and family business specialist at Shakespeare Martineau.