Following the UK’s vote to leave the European Union, many family businesses are re-examining their succession plans. Here’s what you need to know when planning ahead
A growing number of family business owners are opting to review succession plans in light of current Brexit uncertainty and concerns about how it might affect trading performance and retirement planning.
Facing such turbulence, open and honest communication between shareholders is vital and must be maintained.
The outcome of the EU referendum on 23rd June has brought with it a wave of uncertainty, which is affecting the long-term plans of many private businesses, not least family firms.
As witnessed during the recent credit crunch, some family business owners chose to put their own retirement plans on hold while they focused on navigating the way through the economic uncertainty and protecting the business for the benefit of future generations.
Coming so soon after the credit crunch, there is a risk that some family businesses could suffer if younger members of the family become disillusioned or believe that any opportunity to succeed a parent or other family member is being postponed or withdrawn.
For this reason, open and honest communication at board level is important and must be prioritised.
It is not unusual for succession plans to lead to inter-family disputes and they always need to be managed carefully and communicated openly.
When planning for succession, a business owner will need to consider whether they have the right mix of talent and experience within the family or whether they need to bring in additional senior management skills to help the business to grow.
They may not be aware that they can plan for succession in a variety of ways by gifting shares or selling them at a discounted or market rate.
Alternatively, they may wish to retain some shares in the business while continuing to support the management team through the uncertain times ahead and embarking on their transition to retirement. They should obviously consider their tax position before taking any action.
By establishing the right structure for the business at the outset, business owners have an opportunity to secure the best value for family members and other senior-level managers while protecting the long-term interests of the company. Introducing an employee share scheme, such as an Enterprise Management Incentive (EMI) scheme, for example, can help to reward key members of staff and allows the business owner to leave a positive and motivating legacy for the next generation.
With careful planning, alphabet share schemes can also be a useful means of distinguishing between family members and non-family members.
For example, depending on which class of shares they hold, individuals may have defined voting rights or other specific rights related to capital or income.
At times of uncertainty business owners may feel that it is necessary to stay involved in the business for longer than planned in order to support the next generation.
While this might be done with the best of intentions, if succession plans are being altered or put on hold it is important that other family members and shareholders understand how this could affect them.
For example, as the Brexit uncertainty is expected to last for some time, it may be necessary to put in place a number of succession scenarios depending on trading performance.
Many family businesses have strong business leaders at the helm who are able to make decisions quickly and act on them. This can be an advantage at times of uncertainty and means the business will be well placed to take advantage of any opportunities that arise.
However, if business leaders decide to put their succession plans on hold, they must ensure that family members are properly rewarded and incentivised to keep bringing fresh ideas to the table and drive growth in the future.
In this way, family businesses can have the best of both worlds – the stability that comes from an older generation and an established brand that has experience of navigating times of uncertainty and the vigour and creativity of younger family members.
Dave Gosling is a partner and specialist family business adviser at accountancy firm, Menzies.
