What is succession planning, and how can an accountant help?
Succession planning prepares a business for change when the current owner leaves, whether they are retiring, selling the business, or transferring ownership to a family member or employees.
It’s often considered an HR task, a question of who gets promoted and takes on the senior leadership role. But it’s essential to consider succession planning within the context of financial management, as passing ownership directly affects the business’s value, tax position and funding needs. Crucially, it also affects your ability as the owner to extract wealth without weakening the business.
An accountant can guide you through your chosen route to ensure it’s financially workable. Butt Miller has successfully advised many owner managers on the financial implications of their exit, while meeting their personal objectives and protecting the company’s long-term future.
Our focus is to help you make a considered, well-planned exit. That means getting business accounts and structure into shape, valuing the business properly, and planning ahead for tax so you retain as much value in the business as possible.
When should you start succession planning?
Early succession planning gives you the best chance of a successful transition. Ideally, it should begin around five years before you wish to step away.
The owners who come out of it best are usually the ones who started the succession process while they still had time to shape it and keep an eye on future growth.
Early preparation also means you are ready to act if an attractive offer or favourable market opportunity arises, or if there is an unexpected death or illness.
The sooner you bring Butt Miller in, the more room we have to plan the exit around what you actually want, whether that’s a clean break or a gradual step back. Leave it late, and your options may narrow.
Your succession planning options
Here are the four most common routes business owners consider, and how we can help with each. Keep in mind that it’s possible to combine options. Also, ownership does not always have to transfer at once. You might pass over shares gradually or retain a minority interest after stepping back, although the tax and governance implications need careful consideration.
Management buyout
A management buyout is exactly how it sounds: your existing leadership team buy the business from you. If you’ve already got capable future leaders in place who know the operation inside out, this often makes the most sense for business continuity.
The two big considerations are how the deal is funded and how to ensure ownership passes across fairly. We’ll value the business, model how the structure and finance of the buyout works, and help you and your management team agree mutually beneficial terms.
Employee Ownership Trusts (EOTs)
An EOT transfers majority ownership of the business into a trust held on behalf of your employees. The most well-known example of this in practice is John Lewis. It’s a popular route because it rewards the people who built the business and tends to preserve its culture.
An EOT can be particularly suitable where there is no obvious individual successor, but the owner wants to preserve the company’s independence. A share valuation is essential to demonstrate that the price paid by the trust is fair and commercially supportable.
There can be significant tax advantages to this route: a sale of a controlling interest to an EOT can, where the qualifying conditions are met, be free of Capital Gains Tax (CGT) on 50% of the chargeable gain.
We’ll assess whether an EOT is a viable option and handle the valuation and tax side of setting it up.
Selling the business
Selling to an external buyer is the route that many owners consider first, be that a sale to someone in the same industry or a private equity firm.
While an external sale can achieve the most value for the owner, it’s important not to underestimate what it takes. Businesses with robust succession plans are more attractive to buyers and investors. They will naturally scrutinise everything, so the business needs to be prepared well in advance, with reliable financial information, clear contracts, a strong management team and any potential risks addressed before it goes to market.
The structure of the sale also matters. A buyer may purchase the shares in the company or selected business assets, and the payment may be made upfront, deferred or linked to future performance. Each option carries different commercial and tax consequences.
We can value your business realistically, prepare it to stand up to scrutiny, and identify and approach potential candidates, drawing on our mergers and acquisitions experience.
Many family-owned businesses pass down to the next generation, but it comes with its own considerations. The most important one is: don’t assume your family members actually want the job. A successful transition depends on appointing the best person, or small group of people, for the role, rather than the most obvious candidate.
Personal relationships make these conversations harder, which is exactly why an objective read on the numbers helps. We’ll value the shares, plan how ownership transfers in a tax-efficient way, and give you an impartial view of the figures while you handle the people side.
The same considerations apply when shares are transferred to existing shareholders. The valuation, voting rights, dividend policy and future decision-making arrangements should be clearly defined for continuity and to mitigate the risk of disputes.
Considerations when succession planning
Whichever route you choose, there are several important financial considerations regarding the business structure, value and tax position.
Group restructuring
If your business has diversified or has various trading divisions, it may be more challenging to hand over or sell. Reorganising beforehand can create a cleaner, more tax-efficient structure and make the eventual transaction far simpler.
This might involve separating property, surplus cash or investments from the trading company, moving assets into a holding company or protecting assets that will not form part of the eventual sale. These steps should be planned well in advance of any ownership change.
You can’t plan a sale, a buyout, or a share transfer without knowing what the business and its shares are genuinely worth. An independent valuation gives you a fair and realistic figure to plan around, and a solid basis for negotiation with your external buyer, management team, or family member.
Valuations may be needed for an EOT, management buyout, family transfer or change between existing shareholders. In each case, it provides evidence for the agreed price, supports tax reporting and gives all parties a sound basis for negotiation.
Tax planning for business succession
Tax has a big bearing on how much of the value you keep. Depending on the route, Capital Gains Tax, Inheritance Tax, Corporation Tax and the reliefs attached to business assets can all come into play. Business Asset Disposal Relief may also be relevant where the qualifying conditions are met.
How and when you extract value matters too. A full payment on completion may produce a different result from deferred payments, retained shares or income taken over time. These decisions should be considered before the deal terms are fixed.
What looks tax efficient today may not be when you come to act, so it’s worth reviewing your position as part of any formal succession plan rather than assuming it will hold.
The business succession planning process
The succession planning process can often take years and typically follows this process:
- Clarify your goals and rough timescale, ideally at least five years in advance. Do you want a clean break, a phased handover or an ongoing advisory role?
- Identify critical roles and areas of dependency early in the process. Which positions would leave the business exposed if key employees left tomorrow?
- Look at potential successors and skill gaps as future leaders begin to emerge. Who has the ability and appetite to take on a future leadership role, and where might you need to recruit?
- Strengthen the management team, systems and financial reporting well before ownership changes. Could the business operate effectively without the current owner being involved in day-to-day decisions?
- Have the business valued and review funding options once the succession route becomes clear. What is the business realistically worth, and how could the new owners fund the purchase?
- Plan the tax position and how value will be extracted before terms are agreed. How much do you need to receive, when, and what can the business afford?
- Put a clear training and transition plan in place. What knowledge, relationships and responsibilities need to pass to the new leadership team?
- Review the new structure and leadership arrangements after the change. Is the succession plan working as intended, and does anything need to be adjusted?
Working through this process in good time gives you the opportunity to address weaknesses, develop your potential successors and make decisions without the pressure of a fast-approaching retirement or sale date.
Start planning your business succession
The future of your business deserves a proper plan, not a last-minute scramble. Whether you’re years from stepping back or thinking hard about the next 12 months, an early conversation gives you the widest range of options and the best chance of a smooth transition.
We’re chartered accountants rather than financial advisors, so where wider financial advice is needed we’ll say so and point you to the right specialist. Our approach throughout is proactive: plan early, plan well, and review regularly, so the plan still fits when the time comes to use it.
If you’d like to talk it through, we’d be glad to help.
