For the founder of a business, putting in place a succession strategy and exiting the business can be a difficult process. Where some of the founder’s family are also involved in the business, that process can be further complicated by competing interests and differing visions. Every business is unique, but set out below are some guiding principles that can help an exit and a transition to the remaining family members.
As with all planning, don’t underestimate how much time is required not just to put in place a tax efficient and affordable exit, but also to create the new management structure to take the business forward. Five years can go in the blink of an eye, particularly when the founder is busy running the business.
Letting go of the reins can be hard, but taking up the reins can be equally hard. Take a critical eye to those involved in the business and don’t be afraid to upset assumptions. No-one wins with a business ending up in the wrong hands. Many family businesses benefit from non-family members being introduced and given roles of responsibility in areas where the continuing family members lack experience. A non-executive director may help guide a new management team, providing industry expertise and years of experience that the next generation may lack.
Where the founder has been the driving force of the business, he or she should train up their successor(s). This should include involving them in planning and decision making. In addition, their successor should be eased into existing third party/key customer relationships as well as being encouraged to build new ones of their own.
Privately run companies often communicate on an ad-hoc basis. However, where there is an expectation of the founder’s exit it is important to keep key people and sometimes all staff aware of the plans for the future of the business. A well communicated plan can be a great way to incentivise staff, particularly if an absence of communication can lead to uncertainty amongst the workforce.
Dividing the spoils
If a founder is leaving the business to his or her children, there is often the presumption that the business will be left in equal proportions. The question needs to be asked if this is the best course of action, particularly if one child has greater responsibility for the future of the business. A shareholders’ agreement and bespoke articles of association may help formalise the relationship with the successors and also help them understand some of the structural issues around the ownership of the business and possible exit routes for themselves too.
A founder may take the view that he or she wants their family to continue to benefit from the profits of the business but that the running of the business needs to be in non-family hands. The shares, of course, could remain with the family members, but it may be appropriate to set up a family trust to hold the shares, resulting in the trustees acting in the family’s best interests and the family receiving dividend income.
Sale to a third party
Sometimes, keeping the business within the family simply isn’t an option. A third party sale is the most common form of exit in these circumstances. This presents a clean solution, particularly when the rest of the family is not involved in the business or is exiting voluntarily. However, what do you do if there are family members who do not want to take over the business but do wish to stay employed by the business? They may be an excellent asset for the business and for an incoming owner but be realistic—if their presence is likely to cause friction or be a deterrent to a third party purchaser, managing out family members may be better for all concerned.