Business Succession – Failing To Plan Is Planning To Fail

According to Government statistics there were 5.4 million small and medium-sized enterprises (SMEs) in the UK in 2016, making up over 99% of all businesses. Of these, a large number will be owner managed or family businesses, which have their own challenges and rewards in terms of structure, sustainability and future-proofing.

It goes without saying that the ‘core business’ of any company is the key focus for most SMEs, driving sales, improving products/services and achieving profits. But alongside this, there is the often overlooked issue surrounding the future of a business, the exit plans of its current owners and its sustainability beyond the current ownership.

Business Succession Options

For an owner managed business, how long can you go on being at the helm without bringing through the ranks the next tier of managers and potential owners of your business? The people you nurture now could be the ones securing bank funding and taking over the business they’ve helped you build, through a management buy-out. How do you get to that point? It is too easy for owners to say “we’ll put them on the board and give them some shares”. Board level appointments give a person a say on the running of the Company – do you really want that? Perhaps an enhanced job title would be better as it doesn’t carry with it a right to attend and vote at board meetings. Shares give a person a right to a dividend and a return on equity on sale – how much of this do you really want them to have, at this stage? Before entering into these sorts of arrangements, it is crucial to consider the different ways you can incentivise those ‘key’ individuals to remain with, and continue to build the business. Consider alphabet shares, growth shares, or an employee share scheme to govern how the shares are passed to the individual and what rights they carry. These are legal areas which require detailed documentation and involve specific procedural elements to be compliant with the Companies Act 2006.

In a family business, there is often a crunch point which brings these issues to the fore, with ill health or relationship breakdowns forcing management to assess the continued involvement of family members in the leadership and ownership of the business. But by then, is it too late to safely navigate a business through the inevitable uncertainty and turmoil when there is no clear plan in place? A shareholders’ agreement and bespoke articles of association are vital to govern a business of this nature, and to plan for eventualities such as death, ill health and departure from the company whether on good or bad terms. Whilst daunting, and sometimes uncomfortable, it is wise to sit down and discuss those ‘worst case scenarios’ before they happen so a professional can advise you on the legal mechanisms available to deal with those eventualities.

If succession within the business is not an option, how can you prepare your company to be an attractive target for third party buyers? Being profitable and respected in your chosen sector is obviously essential. But also consider the internal machinations of your business; the wheels and cogs which make it run. Look at your contracts, your systems, your policies and procedures, your key employees and your key customer relationships – are they documented? If so, are they up to date? They need to be, if you are to attract a good calibre of buyer who is willing to offer you that dream figure for your shareholding when you do decide to exit. Too often, great businesses are undersold because initial due diligence highlights gaps and omissions in these areas.

Whether you are a start-up, or an established business it is never ‘too early’ nor ‘too late’ to look at your succession plans in order to help safeguard the business you have built, or want to build, to secure not only a significant return on your equity, but also the legacy you leave for the next generation of business owners and employees.

Dav Jaspal is a Partner in Nelsons’ Corporate services team. For further advice relating to business succession planning, please contact Dav on 0800 024 1976 or email newbusinessteam@nelsonslaw.co.uk