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.