Home Contractor's Corner Business Planning: The secret of succession

Business Planning: The secret of succession

Alice Rees (above), Partner and solicitor specialising in corporate law services at leading East Midlands firm Nelsons, discusses the importance of succession planning, and how addressing this early on can provide a clear pathway for the next generation and a secure future for the business…

It’s no secret that construction is facing an uncertain future with its ageing workforce and a lack of young blood taking up roles. When it comes to smaller, owner-managed and family businesses, planning for the next stages is critical.
Business owners need to engage with the ‘what ifs?’ – is there a plan for the business in the event of death or illness?

Thought should be given to a tax-efficient and carefully managed exit, to secure the future of the business while allowing the founders to realise value for the years of hard work and risk. In an ideal world, owners have planned and discussed these elements already, but this is often not the reality, as running a business doesn’t always allow for much beyond the immediate and medium-term challenges.

Creating a pathway
Where a company has two or more shareholders, a shareholders’ agreement coupled with a bespoke set of articles of association is essential. These documents together regulate conduct between the owners and provide certainty around decision making and, critically, in respect of succession, restrictions and a pathway for where the shares might end up in the event of death, illness and/or incapacity.

For unplanned exits such as death and incapacity, a shareholders’ agreement can guide the shareholders through a step-by-step process to facilitate the transfer of shares from the deceased/incapacitated shareholder. Having those processes pre-determined can mitigate some of the stress of doing so in difficult or emotional situations. Owners should also be considering whether shareholder protection insurance might be appropriate and available, which can be linked to appropriately drafted cross option agreements.

The documents should be tailored to the specific business’ needs and, as with all succession planning, they should be reviewed regularly to ensure they remain relevant. Business owners should make time to sit down with the relevant advisors to tackle these decisions.

Passing the torch
Identifying the right successor requires careful thought and can involve difficult conversations, and consequently difficult decisions. The owners should consider whether the business has appropriate family members, a management team, or perhaps a combination of both, who are willing and able to step into ownership.

If a management buy-out is the most likely scenario then advice should be taken early to structure a transaction that provides value for the family founders, and stability and financial security for the business and incoming owners.
Oxford Economics reports that 18% of all UK family businesses are found in the construction sector – more than any other industry – and this prevalence looks set to stay. Those conversations with children or other family members should happen early, to ensure everyone is on the same page and identify whether there are any individuals who are ready to take on the business in future. For those not interested in being involved in the family business, how can they still benefit from the value in the family business?

It may be that more time needs to be dedicated to training and knowledge sharing to keep the skills and insight strong. And likewise, assessing how family members work with other people in the business and how these bonds can be strengthened.

But having a desired internal successor doesn’t always work out. It may be that incentives are needed for ‘key’ individuals to remain with and continue to build the business that go beyond bonuses and pay reviews. This could be in the form of growth shares, or some other employee share scheme.

If succession from within is not an option, with no one identified as having the right skills or desire to take on the business, a recruitment drive may be worth the investment. The succession plan could be built into the hiring process to ensure the right people are identified and share the ambitions of the current owners.

Trade sale
If no internal successor is identified, then it may be that engaging with appropriate advisors to market the business for a trade sale or private equity exit is the prudent option to maximise value for the founders’ family. This could be for a total exit or on a phased basis such that the founders remain in the business on an employed/consultancy basis with or without an equity interest.

A transaction involving a third party, whether a competitor, a business within the supply chain or private equity, is an intense process and any potential buyer will undertake a due diligence process to investigate the target. It is critical that a seller or sellers have the right advisors in place to guide them through this, and it is never too early to start getting the house in order in readiness.

Don’t go it alone
Succession planning can be a minefield; it’s recommended to seek professional advisors from the start who can support with financial and legal matters, as well as advise on tax. Careful planning from the outset can help to structure any exit or transition in the most efficient and cost-effective way possible.

Nelsons provides a range of legal services; through its corporate team we deal with the legal aspects of succession – in whatever form it might take – and we work closely with our fellow professionals in corporate finance and tax advisory to ensure the best possible outcomes for clients. Find out more via the contact details below.

www.nelsonslaw.co.uk/corporate-services

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