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Succession planning for your business

Succession planning is crucial if you want your business to continue to be successful when you are no longer in charge.

What to include in a plan

You should put your plan in writing, so there are no misunderstandings between you and your successor – you can always make adjustments to it in the future.

Make sure that the document just records your strategic plans and is not recorded as a contract (i.e. an agreement with your successor that you will do certain things). If the plan is recorded as a contract, you will not be able to make any changes to it without your successor’s agreement.

The plan can include the following:

  • Who will take over the business – if there is more than one successor, what will each person’s role be?
  • A time frame for when power will be handed over and whether the successor(s) will take charge gradually or all at once
  • How the business will be handed over, such as through purchase or a bequest
  • Details of how the business will provide for you during your retirement
  • Details of the business plan and the vision for the future.

Preparing for future changes

Before you make any decisions about who could take over the company, you should consider how the business will be changing in the future. Will the business be expanding to new markets, or releasing new products?

You could ultimately decide that the management structure of the company should be adjusted when you step down – this sort of change could be appropriate if you started the company and became its figurehead as it grew. Instead of having a single direct successor to step into these shoes, your role and responsibilities could be devolved to a larger management team.

Starting early

Preparing for a successor is something that should be done years in advance, particularly if you are keen for the business to retain the same values and culture that you have cultivated.

If you have a candidate or a number of candidates in mind, you should spend as much time as possible grooming them for the position – you can have them shadow you as you run the business, showing them the ropes and helping them build connections with business partners and customers.

You could also have them work across different parts of the business to gain a better understanding of the company’s inner workings.

Should I choose a single successor?

Instead of grooming a single successor, you could groom a number of candidates and choose the best one when the time comes.

The potential benefits of this are obvious – if one candidate turns out to not be the right person to take over, you will have alternative candidates who could potentially fill the role.

However, there are drawbacks to this approach. Having a number of individuals competing for one coveted position could cause the candidates to resent each other and undermine morale. It could also create commitment issues – if candidates are not guaranteed to get the role at the end, they may be more tempted to jump ship and take a role at a different company.

If the candidates build up a good working relationship, they may decide to leave and set up a rival company together. To prevent this risk, it may be advisable to insert covenants within their contracts of employment to restrict their business activities after they leave employment with you.

Potential legal issues

As with all good planning, it is important to think of the best ways to legally protect yourself. Here are a few examples of things you may need to consider.

Safeguarding your company information

During the planning process, it is likely that you will share information that may be very confidential or amount to a trade secret. It would be advisable to ensure that this type of information is listed as confidential and that all employees, and potential successors, agree not to disclose or use this information for any other purpose than for the company’s benefit.

Selling your business

If you are selling your business you may need to comply with various laws such as the Transfer of Undertakings (Protection of Employment) Regulations 2006. You should take legal advice if this is the case.

Announcing your departure

This is more important to consider if you are trading as a partnership, where you can be held liable for actions taken by other partners, even after you have left. It is imperative that you communicate your departure to all interested parties and put a notice within the London Gazette (and your local newspaper if relevant).

Drawing up the terms of the agreement

If you are selling your business, or wish to remain as a silent partner, then it is important that the terms of your agreement are accurately and clearly recorded in a binding agreement, i.e. a contract. It would be advisable for a legal professional to do this on your behalf.

Restructuring your business

If you intend to restructure your business before you leave then you will need to ensure that you act in line with best practice and employment law. It would be advisable to take professional legal advice from an employment specialist.

Death

No one wants to think about this, but what would happen if you were to pass away before your succession plans were complete? You may be able to minimise this risk by talking through your plans with a successor and/or updating your Will. Taking specialist advice from a family lawyer may be helpful.

This is by no means a complete list, so you should get legal advice before putting the plan together.

Succession planning for family businesses

Succession planning is a slightly different prospect if yours is a family business. Having children and other family members prepared to take over the business can be beneficial for the business, as those other members will likely have been around the business for many years beforehand – they will probably be intimately familiar with the values of the business, and have a keen interest in keeping it going.

However, this is not always the case – more and more family businesses are finding the next generation is unwilling to carry it on.

If the business is to be taken over by other family members, it’s a good idea to establish the roles that each family member will take early on – if you leave this too long, it could lead to unhealthy competition and resentment between them.

You could also establish a dispute resolution process to settle any disagreements that arise between family members in the running of the business.