What is succession planning for a business?
Transferring your enterprise to the next generation or a business partner? Start planning for the future of your business with our guide to business succession.
Small business life is hectic, so considering the future does not appear to be a priority. Regardless of whether you intend to transfer business ownership to a family member or to a business partner, planning ensures that your hard work will be protected after you've left the company.
It is never too early to consider the future, especially if you have growth and expansion plans. Your position as business owner leaves a critical void. It is reassuring to know that your business will be in capable hands if the unexpected occurs or if you simply decide to step back.
What is the definition of succession planning?
Business succession planning is the process of determining who will take over your company in the event of your retirement or an unforeseen event. This procedure is still necessary for smaller, family-owned businesses to ensure their continued operation.
Even if it seems far away, early preparation can provide peace of mind.
What advantages does succession planning offer?
Prepare yourself for the unexpected
Be clear on your retirement plans
Simplify the process
Have faith that your enterprise will be in capable hands.
Future expansion of your business
Commence planning early
The transfer of ownership does not occur overnight, but sudden change is possible. Being proactive will allow you to successfully implement a plan on short notice if you need to resign from the company, providing you with peace of mind.
For instance, if you own a limited liability company and wish to divide ownership among several children, drafting a shareholder's agreement in advance clarifies the decision and prevents future disputes.
Select a business successor
You must then determine your ideal successor. Typically, children or other family members assume control, but you could also choose a business partner, a senior employee, or even an external buyer. With our guide, you can learn more about the process of selling a business.
Changing ownership can have a significant impact on how a business operates, especially if it was founded by a group of individuals with diverse skills and experiences. Therefore, selecting the ideal successor is crucial. Determining how the void left by a departing employee can be filled is essential for ensuring the business's continued success.
When deciding who to choose, ask yourself:
If your business partner is assuming more responsibility for the company, for instance, you must determine how responsibilities will change. Can they handle additional responsibilities, or do you need to hire additional personnel?
As a result of leaving the company, you may no longer be able to provide a particular service or skill as effectively. This may impact how you expand your business in the future. Do you hire individuals to maintain the same level of service, or do you gradually phase it out in favor of expanding the business's remaining areas?
Certainly, if you are selling your business, you should hire a lawyer who can handle the complexities involved. For instance, an external buyer may require restrictive covenants prohibiting you from competing with the business you have sold for a certain period of time and/or within a certain geographical area. Similarly, it would be prudent to seek indemnification from your buyer against future legal action upon selling your business.
Create your plan for transferring business ownership.
Having your strategy in writing increases the likelihood of a transition with minimal disruptions. You should take into account the following factors:
The possible timeline for the transfer of ownership
The individual who will succeed
Your company's value
Important documents pertaining to personnel, procedures, etc.
Informing your employees
If your company's ownership changes, you should immediately notify your employees and shareholders. You must inform them of the change in your company's management and operations and keep them informed of any changes that directly affect them. This is likely to inform shareholders of how their continued investment will function. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (commonly referred to as TUPE) protect an employee's rights when their employer's ownership changes. If TUPE applies, your employees will automatically become the employees of the incoming employer under their current terms and conditions of employment, unless they are made redundant. Employees have the right to transfer under the same terms and conditions of employment, unless a situation akin to redundancy applies or there is a change for reasons unrelated to the transfer. The law also requires that you provide certain information about the transfer to your employees and employee representatives, as well as possible employee consultation requirements. You must also provide the new employer with specific employee information.
The staff must also be informed if the change in ownership may result in layoffs. If so, a fair redundancy consultation process with those at risk of redundancy should be followed. Where redundancies are confirmed, the correct contractual notice of a redundancy dismissal must be provided, and redundancy payments must be made to eligible employees.
Informing Tax Administration
The tax implications of selling a business may change. For instance, if you operate a business as an entrepreneur and are considered self-employed, you may need to complete a self-assessment form.
If you sell your business but continue to serve in a senior or executive capacity, you may find that you are now considered an employee and your taxation falls under an automated system, which affects how you pay taxes. If you own multiple businesses, you should consult with an accountant to determine what steps you need to take to comply with the law.
If you plan to retire and are selling a business, you must inform the tax authorities that you have retired and that tax responsibilities for the business have been transferred to someone else. You may be able to transfer your VAT registration to the new business owner if you are VAT-registered.
Death
Obviously, this is not a pleasant subject to consider, but one scenario in which your succession planning, if any, will be scrutinized is when you pass away. Certainly, this can occur suddenly and unexpectedly. If nothing else, it is always advisable to have a properly drafted will to ensure that your wishes are carried out upon your death, as certain intestacy rules automatically apply in the absence of a will.
