Running a family-owned business is a source of pride and accomplishment for many. It represents hard work, dedication, and a legacy that could last for generations. But have you considered what will happen to your business when you're no longer able to run it? Whether through retirement, illness, or unexpected death, the day will come when you’ll need to pass the baton to the next generation.

As solicitors with extensive experience in helping family businesses plan for the future, we have seen how effective succession planning can ensure the continuity of the business while avoiding unnecessary legal and financial complications. In this blog we explore how family-run businesses can safeguard their future and make succession a smooth transition.

Why succession planning matters

Succession planning is about more than just deciding who will take over when you're gone. It’s about creating a strategy to ensure the ongoing success of the business, preserving its values, and maintaining harmony within the family. Without a clear plan in place, family-run businesses can face:

Disputes between family members: Different opinions on how to run the business can create tension or even legal battles;

Tax inefficiencies: Poor planning can result in hefty tax liabilities, leaving less for the business and the next generation; or

Disruption in business operations: The absence of a designated successor can create confusion and slow down decision-making, threatening the business's future.

By addressing these potential pitfalls early on, you can secure the future of your business and protect your family from unnecessary stress. Here are our top tips to help navigate this:

Create a clear succession plan

The first step is to develop a comprehensive succession plan. This should outline not only who will take over the business but also how and when this will happen. Consider the following:

Who will succeed you?

Will it be one of your children, a spouse, or another family member? You may even consider bringing in an external manager if family members are not interested or equipped to run the business.

When will the transition happen?

Some business owners may wish to retire and hand over control during their lifetime, while others prefer to stay at the helm until their passing. A gradual handover can ensure continuity and provide the next generation with time to adapt to their new role.

What role will you continue to play?

If you’re not planning to step away entirely, be clear about your ongoing involvement to avoid confusion or conflict.

Once you’ve made these decisions, document the plan formally, ensuring all relevant parties understand and agree on the next steps.

Consult with legal and financial experts

Succession planning involves some complex legal, financial, and tax issues. Involve the right professionals early to make sure your plan is watertight. Things to consider will be:

Wills and Trusts: Make sure your will is up-to-date and reflects your wishes for the business. Trusts can be a useful tool to pass on the business without facing significant tax liabilities.

Shareholder Agreements: If the business is owned by multiple family members, consider a shareholder agreement to define the rights and responsibilities of each shareholder. This can help prevent disputes down the line.

Business Structure: Evaluate whether your current business structure (e.g., sole trader, partnership, or limited company) is the most tax-efficient for passing the business on to the next generation. It may be worth restructuring to minimise tax liabilities or provide more flexibility.

Inheritance Tax Planning: Without proper planning, the next generation could face significant inheritance tax (IHT) bills when the business is transferred. Business Property Relief (BPR) is a valuable relief for family businesses, but the rules are complex. Seek advice on how to maximize these benefits.

Prepare the next generation

A successful transition doesn’t happen overnight. It requires time, training, and, sometimes, tough conversations. Here are some steps to help prepare your successors:

Training and Mentoring: Whether your children or other relatives are stepping into leadership roles, make sure they have the skills and experience needed to manage the business. Encourage them to work in various areas of the company, or even outside of it, to gain broader perspectives.

Open Communication: Be transparent with your family about your succession plans. By setting clear expectations, you can avoid future misunderstandings and disputes.

Ownership vs. Management: It’s essential to distinguish between ownership and day-to-day management. Just because a family member owns part of the business doesn’t mean they’re equipped to run it. In some cases, you may want to separate ownership from management by appointing professional managers to run the business, while family members take on more strategic roles as shareholders or directors.

Plan for the unexpected

Even the most well-thought-out succession plan can be derailed by unforeseen events, such as illness, incapacity, or sudden death. Although this can be difficult to think about or talk about, you should make sure your plan accounts for these contingencies.

Lasting Power of Attorney (LPA): Appointing an LPA allows someone you trust to make decisions on your behalf if you become unable to manage your affairs. This includes managing the business, dealing with banks, and signing contracts.

Insurance: Life insurance and key person insurance can provide financial security for your family and the business in the event of your untimely death or incapacity. Insurance proceeds can be used to cover taxes, buy out other shareholders, or provide working capital for the business.

Buy-Sell Agreements: If the business is owned by multiple family members, a buy-sell agreement can ensure that, in the event of death or incapacity, the business is sold to the remaining family members rather than to outside parties. This protects the business from fragmentation or falling into the hands of non-family members.

Review and update the plan regularly

Your business, family circumstances, and tax laws will change over time, so it’s essential to review and update your succession plan regularly. Aim to review the plan every few years or after significant life events such as marriage, divorce, or the birth of new family members. By keeping the plan up to date, you can ensure it remains relevant and effective.

For many small family-run businesses, planning for the future can feel overwhelming, especially when it involves thinking about life after your own involvement. However, with the right legal and financial advice, you can create a solid succession plan that ensures the longevity of your business and protects your family’s legacy.

If you haven’t yet started the conversation, now is the time. Preparing for the inevitable not only safeguards the business but gives peace of mind to you and your loved ones. As experienced solicitors, we are here to guide you through every step of this important process, helping you secure the future you’ve worked so hard to build.

For advice on succession planning or to discuss your individual circumstances, feel free to contact Sarah Naylor, Head of Commercial and Dispute at sarah.naylor@switalskis.com or call 01302 320621.