Planning to Sell or Exit a Business? Here’s What You Need to Know About Succession Planning

Posted on 5th October 2023

When considering exiting or selling your business, there are two key things to consider; succession planning and preparing your business for sale.

Alex Hall, Senior Associate in the Corporate Law team, and Nick Rhodes, Head of the Wills & Probate team at Blacks Solicitors, discuss how to exit a business and succession planning.

Passing a business down through generations

According to Alex, passing a business down through generations needs to be thoroughly planned over several years. “It’s vital that business owners ensure successors are integrated early and responsibilities are gradually handed over prior to the current shareholder retiring. It will be in the best interests of both the successors and the business to ensure that the incoming generation have the skills, expertise and experience to take over the reins.”

Similarly, Nick advises that when a business owner or shareholder considers exiting a business, there needs to be a joined up approach: “On the face of it, you can simply leave your shares of a business using your Will, however, this may not be best for the business.

“For example, in the case of a small company, it may be unfair if a shareholder leaves a large stake of the company to a spouse who is not involved in the business. It’s advised not just to write a Will reflecting your wishes, but also to establish a shareholders’ agreement or cross option agreement. For example, if a large stake of a business is left to a spouse in a Will, a cross option agreement allows the shareholders to buy these shares so that the spouse can inherit the value of the shares, but the business is kept within the hands of those who are involved in it.”

Organising a management team buyout

When it comes to organising a successful management team buyout, Alex advises that it must be thoroughly planned and organised prior to the business owner leaving. “Employee share schemes can be put in place to effectively build up a management team which is slowly given more responsibility and earn shares through a scheme such as an Enterprise Management Incentives (EMI) scheme. Employee incentives, strong communication and training must be well established so that the business owner has a solid, motivated and committed team to take over and ensure longevity of the business.”

Third party sales

Whilst preparing a business for a third party sale you must ensure your business is in the best position for sale. Alex comments that: “The business, its processes and team need to be well established to run and grow without the business owner. This involves ensuring you’ve got a strong pipeline and team to deliver it once the owner retires or leaves. A business that can run independently of its founders will often be more attractive to third party buyers, maximising the price that they are willing to pay.”

Nick adds: “When a trading company is sold to a third party, shares of a business might qualify for business relief. It may be advisable to consider putting those shares into a trust prior to the sale for inheritance tax purposes.”

Employee ownership trusts

Employee ownership trusts surged in popularity around 2017 and we’re now seeing a second spike after Covid. Notable and successful employee owned companies include the John Lewis Partnership which transferred into a Trust for the benefit of its employees in 1929 and is now the largest employee-owned business in the UK, being 100% owned by its staff.

Alex advises: “Employee ownership trusts offer tax benefits for both shareholders and employees. Through an employee ownership trust, employees indirectly hold an interest in the company, which generates greater engagement and commitment and can lead to innovation and improved performance. The trustee board can be made up of employees, the exiting board of directors and independent trustees and will often be regulated by an employee committee or council. The council will have the right to, amongst other things, appoint and remove the trustees and veto a distribution of trust assets.”

Nick also advises: “When starting employee ownership trusts, or at any other change of circumstances, it is important to review your Will to check that it still meets your wishes and that it is drafted in a tax efficient manner. Tax reliefs and rates do change so it’s always important to make sure your Will takes account of any change to the rules.”