For many people, the notion of an ‘heir apparent’ or ‘successor’ is usually only reserved for history lessons, or the frenzy surrounding a royal birth. But when it comes to business – and family-owned independents in particular – the principle of succession plays a vital part in securing the future sustainability of a company.
Whether you’re heading for retirement, exiting a business for pastures new, or simply handing over the reins to young blood, the process of planning for departure is one that requires careful consideration to ensure the business is structured correctly and the ‘heir apparent’ is well placed to complete a smooth transition.
So, what are the biggest considerations and challenges the owners of independent opticians when gearing up for that crucial handover?
Top candidates
Firstly, it may seem obvious, but it is important to establish who is best equipped to take over the business. Academics believe that insiders make far better successors than those drafted in from the outside. But, far too often assumptions are made about these individuals, without actually clarifying what these responsibilities would entail and identifying whether it is a job they really want, or are qualified to do. What’s more, very little thought is often given to implementing a comprehensive training and knowledge-sharing process to ensure it will be ‘business as usual’ following a change in leadership.
Timings
Timing is everything, particularly when exiting a business. Management of succession should be at the core of how a business is run and not an after-thought once a decision has been made to leave. Unsurprisingly, surveys continually show that a significant proportion of business owners don’t have a succession plan in place. They often put it down to time constraints, while running the business, or an uncertainty about who will take over responsibility. That said, businesses are constantly evolving, so regular consideration should be given to updating a carefully crafted succession plan, to ensure it reflects the company’s current and future state.
In the current economic climate, many business owners have chosen to push back their exit plans to account for under-performing investments, or problems related to their company’s cash flow or debt burden.
Although conditions are improving, it’s important to have an open and ongoing dialogue with your bank, to ascertain if there is any scope to rewrite existing debt and potentially release extra capital for the practice’s future development.
Ownership
The issue of ownership is extremely important. Are you exiting completely? Are you retaining a stake in the business without day-to-day control? Or do you wish to remain involved in a lesser capacity? The structure of ownership will vary dramatically, depending on your future plans. When it comes to transfers, these may involve family members or management insiders and typically aim to maintain continuity of leadership and protect the value of the company. A successful transition plan will outline both the transfer of control of the business to the designated successor, as well as the transfer of assets, which may involve several individuals.
This process will require the involvement and cooperation of the business owner’s legal and financial advisers, as a team approach is often best practice.
Financial advice and due diligence
The value of due diligence is just as great in transferring a business, as it is when looking at potential acquisitions. It is essential to review the business’ accounts, finances, life assurance protection and any existing pension funds to ensure all tax and family protection issues are covered.
Pension funds
When retirement comes into play, the issue of pension funds becomes a firm player in any succession plan. Small Self-Administered Pension Schemes (SSASs) are widely considered to offer the pension path for people who run their own business, as they allow members to control their fund, can be used to invest in the business, are flexible and can be utilised to buy the commercial property for the business to occupy.
During the succession planning process, it’s important to consider whether people, in particular children, need to be added to the SSAS – defining what their contribution should be. Adequate funding of the plan for the retirees helps to achieve a smooth transition for the generation taking over in family businesses.
Departure gates
When to exit a business is never an easy decision to make – and not one that immediately springs to mind when drafting a company meeting agenda. But the challenges and considerations that come with leaving a company should remain firmly on the boardroom table, regardless of whether the move is in five, 10, or 15 years’ time. In addition, you should also consider how you plan to spend your free time and how this will fit in with other family members.
For more information visit www.carpenter-rees.co.uk