What is business succession planning?

Blogs 1 Oct 2021

Passing down your business to a new generation or a business partner? Start preparing for the future of your business with our practical guide to business succession planning.

A father and son plumbing team stand next to their van with arms crossed

 This content was reviewed 23 September 2024


Running a small business is often hectic, so thinking about the future doesn’t seem like a priority. However, whether you’re planning to transfer business ownership to a family member or hand over control to your business partner, planning ahead ensures you can protect the hard work after you’ve left the business.  

It’s never too early to start thinking about the future, especially if you have plans for growth and expansion. Your role as business owner leaves a crucial gap to fill. If the unexpected happens or you simply decide it’s time to step back, knowing your business will be in the right hands is reassuring. 

What is succession planning? 

Business succession planning is the process of deciding who will take over your business in the future when you retire or the unexpected happens. This process is still relevant for smaller, family-run businesses to make sure the business can continue to run smoothly.  

Even if it seems like a while away, preparing early can give you peace of mind.  

What are the benefits of succession planning? 

  • Get ready for the unexpected 
  • Be clear on your retirement plans  
  • Make the process easier 
  • Have confidence your business will be in the right hands 
  • Future growth of your business  

Start planning early 

Transferring ownership doesn’t happen overnight, but sudden change can. Being proactive will allow you to successfully implement plan at short notice if you need to step down from the business, giving you peace of mind.   

For example, if you are a limited company and want to share the ownership between several children, putting a shareholder’s agreement in place in advance makes the decision clear and avoids any arguments down the line.  

Choose your business successor 

Next, you’ll want to identify your ideal successor. It’s common for children or other family members to take over the reins, but you could also choose a business partner, a senior employee or even an external buyer. You can learn more about the process of selling a business with our guide.  

Changing ownership can drastically shift how a business works, especially if it was set up by a group of people with different skills and experience. That’s why choosing the right successor is so important. Working out how the gap left by someone leaving can be filled is crucial to ensuring that business is able to continue to perform. 

When thinking about who to pick, ask yourself: 

  • Do they have the right skills, training, and necessary qualifications? This may be more important if you’re in a specialised industry.  
  • Do they have relevant experience and knowledge about the business? 
  • Are they interested in the business and its success? 
  • Do they align with the values, mission, and goals of your business? 
  • Do they have existing relationships with key stakeholders or long-term clients? 
  • Are you still going to be retained in some capacity, for example as a consultant, and will that be properly documented? 

If your business partner is taking control of more of the business, for example, you need to assess how responsibilities will change. Can they manage additional responsibilities, or do you need to take on new staff to help you manage? 

Leaving the business may even mean you can no longer offer a particular service or skill as effectively. This might influence the way you grow your business in future. Do you hire people to maintain that same level of service or do you gradually phase it out in favour of building up the remaining areas of the business? 

Certainly if you are selling your business it is advisable to appoint a solicitor who can handle the complexities of this.  As an example, an external buyer may want restrictive covenants meaning that you cannot operate in competition to the business you have sold for a certain period of time and/or in a certain area.  Likewise upon exiting to would be wise to seek certain indemnities from your buyer against any future legal action. 

Make your plan for changing ownership of your business 

Putting your approach in writing gives you the best chance of a smooth transition with minimal disruptions. You should consider the following factors: 

  • The potential timeline for transferring ownership 
  • The person who will take over 
  • Your business valuation 
  • Key documents regarding employees, procedures etc.  
Informing your staff 

If your business changes ownership, the first thing you should do is notify your staff and shareholders. You need to let them know of the change to the management and running of your business and keep them informed of any changes that directly impact them.  For shareholders, this is likely to be informing them of how their continued investment will work.  The Transfer of Undertakings (Protection of Employment) Regulations 2006, (commonly known as TUPE) protect an employee’s rights when the business they work for changes ownership.  Where TUPE applies, your employees will automatically become the employees of the incoming employer on their existing terms and conditions of employment, unless a redundancy situation applies. Employees are entitled to transfer on their same terms and conditions of employment, unless a redundancy-type situation applies, or there is a change to these for a reason not connected to the transfer. There is also certain information about the transfer you are required to give your employees and employee representatives by law, as well possible employee consultation requirements where the transfer may.  You will also need to give the new employer certain information about your employees.  

Staff also need to be informed if the transition of ownership may result in redundancies. If so, a fair redundancy consultation process should be followed with those at risk of redundancy.  The correct contractual notice of a redundancy dismissal will need to be given and redundancy payments made to eligible employees following consultation where redundancies are confirmed.   

Telling HMRC 

Selling a business might change the way in which you’re taxed. For example, you might run a business as an entrepreneur and be classed as self-employed, meaning you might fill in a self-assessment form. 

If you sell the business but then stay on in a senior or executive role, you may find you are now classed as an employee and your taxation falls under an automated system, which changes the way you pay your taxes. If you own multiple businesses, it is worth talking to an accountant to assess what steps you need to take to ensure you stay on the right side of the law. 

If you’re selling a business to someone else with a plan to retire, you need to inform HMRC to let them know you are retired and that tax responsibilities for the business have passed onto someone else. If you’re VAT registered, you may be able to transfer VAT registry to the new business owner. 

Death 

Obviously this is not a pleasant subject to consider, but clearly one scenario where the spotlight will shine on what succession planning, if any, you have done, is when you pass away. Of course this can happen suddenly and unexpectedly.  If nothing else it is always advisable to have a properly drafted will so that your wishes are followed on your death, because without this certain intestacy rules automatically apply. 

Loss of mental capacity

This is another topic people often do not want to think about, but it is worth considering  whether you should have a lasting power of Attorney (LPA) in place.  These used to be called Enduring Powers of Attorneys. If you lost the ability to make decisions yourself, whether that be immediate or over the passage of time, an LPA allows someone you trust to make decisions on your behalf. If you don’t have an LPA then it would be necessary to apply to the Court of Protection which is time consuming and laborious, and everything remains in limbo until this is done.

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