Plan for succession in a family business

There are 1.6 million family owned businesses in the UK but over half of these company owners have made no plans for what they will do with their business when they retire.

However, it is vitally important that preparations are made to avoid confusion and conflict in the future.

Succession is not a single event, but a process that should take place over several years requiring planning, teamwork, and constant re-evaluation.

When considering succession various options exist. These include handing over ownership to offspring or other relatives, passing control to a non-family manager or disposing of the company through a sale, management buy-out (MBO), management buy-in (MBI) or voluntary liquidation.

Family members

Handing over control to a relative is the most popular choice for family business owners. Many who opt for this route feel happy they are leaving the company in safe hands and confident they will be able to continue to play a part in running it.

But care should be taken when picking a successor as decisions are often made on emotional grounds or to avoid family arguments. While the most obvious person may be the eldest son, for example, he may not be the best choice for the company. It may also be tempting to put different children in charge of different parts of the firm to demonstrate equal treatment. However this can cause problems later on, so aim to pick one main successor.

is the choice of successor committed to running the business?
does he/she possess the correct leadership and management skills?
is he/she capable of progressing the business?
is there someone else within the family more qualified and interested in running the company?

Conduct open discussions with your family at work rather than at home. Consider also involving an independent third party such as a business adviser or non-executive director.

Once the choice has been made, the person should be fully prepared for their new role through formal training and mentoring. Allowing the successor to work across different areas of the company is a good way of getting them up to speed about the business operations.

Calculate how much income you will require when you retire and how this will be linked into the future performance of the company. You should also be aware of your tax position and seek the advice of a financial expert on inheritance tax and capital gains tax.

External successor

If no relatives are deemed suitable, or want the role, an alternative person from outside the family must be found. This could be someone who already works for the company, a business adviser, or a complete stranger. The process used when appointing a relative should also be followed when choosing an external successor.

Appointing an external successor can be a contentious issue so all staff members should be made aware of the reasons for the decision and the benefits it will bring to the company. To avoid any conflict or resentment, key employees should be involved in the whole succession process including the training and mentoring.

Selling the business

While deciding to sell a business can be a hard decision, this may be your most appropriate option. To secure the best price for your company it is essential that you plan well in advance.

Seek the advice of a corporate finance adviser for guidance on ensuring your business commands the most competitive offer but make sure that you use the most appropriate adviser for the size of your firm. It may be useful to consult a number of advisers so you can compare their good and bad points.

You should also ensure that any issues which could endanger the sale of your business are overcome. This includes any legal action being taken against the firm or tax investigations.

During the due diligence process, which involves responding to enquiries from potential purchasers, make sure you get every skeleton out of the cupboard otherwise you could be sued in the future for not declaring particular liabilities. When presenting your case make sure you include a detailed business plan and strategic projections for at least three years.

Management buy out

A Management Buy Out (MBO) is the purchase of a company by the management team, already employed to run the business. This option is particularly useful for family firms looking to overcome succession issues and offers the following benefits:

the hand over of the business is often completed quickly as the buyers will already have a good knowledge of the company
allows you to feel confident in the knowledge that your business is being run by trusted and committed people
allows you to depart from your business in an amicable way
allows you to quickly realise value for the business you have created

Businesses suitable for an MBO should have the following characteristics:

a strong track record
good growth potential
be cash generative
a competitive advantage or unique selling proposition
be, or capable of becoming, a business that can be sold in the near future

Management buy in (MBI)

A Management Buy In (MBI) is the process by which an external management team takes over the running of a business. An MBI requires similar financial backing to that required by an MBO but many institutions view them as more risky.

Many venture capital firms include teams willing to buy into existing companies. When looking for potential investors carry out detailed and formal assessments of each candidate and ensure they have a proven track record in the same industry or sector in which you work.

A company suitable for an MBI should display the same characteristics as those for an MBO but MBIs also have the following disadvantages:

the new management team will be less familiar with the internal workings of your business
conflict may be created with existing staff who may feel suspicious of ‘outsiders’ coming in and taking over the business

BIMBO - Buy In Management Buy Out

This option is the combination of an MBO and MBI and involves the internal management team bringing in an external manager. This method combines the knowledge of the existing team with the extra expertise of a person from outside the company.

Voluntary liquidation

This process is usually the last option when all others have been carefully considered. All company assets are dissolved, staff are paid off and the business is closed down. Generally, voluntary liquidation involves great costs so if you are looking to raise money this option is unlikely to provide you with the best return.