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A Grown-Up Guide to… Succession

What is it?

Succession is what comes next.  It’s what happens to a business when the people running it move on, and how to make that process as smooth as possible.

 

Who does it affect?

At some point in the life of every business, ownership will change.  It could happen for financial reasons, someone wants to sell the business for money.  It could happen for personal reasons, someone gets sick, they retire, or they just want a change in lifestyle.  There are a number of reasons ownership could change, but it will definitely happen.

Directly, succession affects owners, operators and senior managers.  It’s especially relevant for smaller businesses who are most affected by a major change because of their size.

Indirectly, it affects employees, clients and suppliers, because a change at the top of a company will usually change the culture and direction of the business.

In this guide, we will look at changes of business ownership.  Senior management also need to consider succession within their team.  Have a look at our recent article on business continuity for more details.

 

What you should do…

There are really only three routes a business can take when ownership changes:

  • The business is wound down, ceases trading, and is dissolved.
  • Keep it in the family. The business continues and is passed on to the next generation.
  • Sale.  A new owner buys the business.

We’ll look at each of these routes in turn.

 

Closure

If you choose to close your business, you release any capital and assets tied up in the company, but it ceases to exist so the reputation and goodwill you’ve built up will end.  There are also costs to consider.  If you employ staff, you’ll have liabilities to them for notice periods, redundancy payments, final tax and NI contributions etc.  If you are making more than 20 people redundant, there are additional collective consultation rules you need to follow.

You will have to go through a formal striking off process with Companies House and finalise your tax, VAT and PAYE arrangements.  You may also have Capital Gains Tax liabilities on any cash or assets you take out of the business.

A closure is OK for sole-trader type businesses, or those with only a few employees, but it would be a shame to waste the time and effort you’ve spent building up a brand and reputation if the company is any bigger than that.  There are better options that would allow the current owners to walk away, leaving the business as a going concern.

Any decision to close a business needs to be carefully managed to ensure a structured closure.  You need to inform employees, clients and suppliers.  You will have to set a final trading date, continue to trade out existing commitments up until that date.  It’s also important to continue to honour all payments and commitments on time.  Otherwise, there’s a risk of clients finding other suppliers early, or of staff leaving earlier than you intended, potentially leaving you with a gap in your forecast revenue, unexpected costs or an inability to deliver your final contracts.

 

Keep it in the family

Passing a business on within the family usually ensures that culture is maintained, it will be ‘business as usual’.  Rather than a sudden change, it’s better to do a phased approach over time to ensure continuity.  It’s important to tell people what’s happening, you can’t just parachute someone in and expect your employees to accept the newcomer.  Anyone taking over a business needs to learn the ropes and build relationships.

There are tax liabilities you need to consider – whoever takes ownership of the company will be inheriting an asset.  If you take any cash or assets out of the business before you pass it on, you may have Capital Gains Tax liabilities.

The business will have commitments that will continue to exist under the new ownership; the employees and payments, debts, loans or contracts with clients or suppliers will continue, and must be honoured unless there are specific break clauses that can be activated.  Other legal duties exist, to ensure that the company registration is updated for example, and to make sure HMRC are notified of any changes if required.

It is also wise to define a role for whoever has left.  Have they gone completely, or are they still around and involved in some way, perhaps in a non-executive role or as a minority shareholder?  The departing owner will need to do some financial planning of their own, they are likely to have a loss of salary or dividend.

 

Sale

Selling a business can be internal, through a management buy-out, or external to an independent purchaser.  Either way, there will be an equity release for the departing owner and someone else will take over.

It’s important to define exactly what is being sold.  Does the sale include all premises and assets, is there a payment for goodwill, are vehicles and stock included, and at what value?  Is anything being retained by the departing owner, are there personal possessions they plan to take with them?

Consider the liabilities that will pass on to the new owners.  If the business continues as a going concern it’s likely that all commitments and liabilities will pass over to the new owners.  However, some contracts include a break clause that can be activated by a change of ownership.  If the business is bought by another company, or if it closes and then re-opens under another name, these commitments and liabilities all need to be carefully considered.

If you are selling a business, you need to build in value over a three- to five-year period.  You can’t just cash load the business in the last twelve months or overvalue assets, potential purchasers will spot that and it will be reflected in the price you achieve.  You also need to consider the role of the outgoing owners and/or directors.  It’s likely there will be some form of retained role with earnout clauses.  While this results in a smoother transition and continuity, it means the outgoing owners remain committed to the business for a period of time, they don’t get a clean break.

 

In summary, any type of succession or change of ownership of a business should not be a snap decision.  When the time comes for an owner to move on, you should be looking at a three- to five-year plan to ensure everything goes smoothly.  To get the maximum value out of the company you have worked hard to build, plan ahead.  It’s possible there will be a ‘hit by a bus’ scenario where succession is forced, but even in that unlikely circumstance, having plans in place will help make the transition easier to manage.

 

Need more information?

There are some very clear, simple articles on the gov.co.uk website, and Companies House has guidance on how to close a company.

Your accountant and financial advisor will be able to help you with tax and financial planning.

For independent, real-world solutions, talk to a Grown-Up and we’ll help you make the right succession plans for your business.

 

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