Securing the future: succession planning for small businesses

Securing the future: succession planning for small businesses

In a post-pandemic world, the resilience of small businesses is being tested like never before. The exceptional challenges brought about by Covid-19 have highlighted the importance of having clear plans in place for the continuity and succession of businesses, regardless of size and structure.

It’s never nice to think about the possibility of premature death or long-term incapacity, but anticipating the unexpected has become more vital than ever for business owners. Without the right planning, unforeseen circumstances can disrupt the trajectory of a business, sometimes with distressing consequences.

Fortunately, there are simple and cost-effective ways to ensure the future of your business is in safe hands if the worst does happen.

How do I start a succession plan?

A good starting point is to set aside some dedicated time to consider what you would like to happen to your business, if you were no longer able to lead it. Being well prepared not only protects the interests of the business, but also alleviates the burden on family members and successors during times of crisis.

The next step is to formalise your wishes legally. This can reduce potential risks to your business and ensure a smoother transition, regardless of circumstances.

Succession planning for sole traders

For sole traders, this could come in the form of making a will, in which you should clearly state who you would like to take over your business. Alarmingly, around 60% of people in Scotland have not got round to making a will. That’s understandable, as nobody wants to think about the subject of death – but if you own a business, you should make it a priority.

In Scotland, the legal landscape surrounding succession planning adds another layer of complexity to the equation. The spouse and children of a deceased person hold automatic claims to their ‘moveable assets’, a term which refers to everything in their estate apart from land and buildings. This could include business assets. Failure to address these legal intricacies can result in unintended consequences.

Succession planning for incorporated or limited companies

For incorporated or limited companies, the governance documents of the business also need to be considered. You’ll need to ensure that there are no clauses in your Articles of Association or partnership agreement that would prevent the business from passing to the person or people of your choice. It’s not unusual for clauses to exist that hinder the transfer of certain aspects of a business to a designated successor listed in a legal will – so careful alignment is required.

What should I consider when succession planning?

Beyond legal considerations, openness and honesty are essential for effective succession planning. Business owners should always talk frankly with their potential successors, to confirm they are aware of their plans and that they agree to take on the business if necessary. After all, nobody wants to leave their company to someone who would rather not have that responsibility.

Furthermore, in cases where successors are young children, appointing interim caretakers or guardians is essential until the children are old enough and mature enough to take over.

Once succession plans are in place, business owners should re-evaluate them at least every five years, and following any significant life events such as births, deaths, marriages, or mergers.

I also recommend that a business considers its future over the next five, ten and twenty years, putting plans in place for all possible outcomes across these timescales. By adopting this approach, future challenges can be anticipated and plans can be adapted, ensuring long-term viability and resilience.

Seeking professional guidance from a legal advisor can address any uncertainties and provide peace of mind. People are often put off consulting a solicitor because they worry about cost, but initial consultations are often free of charge and provide insights into risk management and legal requirements. Even if you already have a succession strategy in place, but are unsure if it is sufficient, it’s a good idea to consult a legal specialist.

Why the value of your estate matters

And if your total estate – including the value of your business – is likely to be over the inheritance tax threshold, which has been frozen at £325,000 since 2009, it’s also worth taking expert advice on the more complex aspects of the law surrounding tax. This will allow you to pass more of your hard-earned assets on to your chosen successors, rather than the taxman.

By formalising your wishes and seeking professional guidance to understand all the legal complexities, you can ensure a smoother transition for your business if the unexpected happens, reducing the risk of legal complications whilst also protecting the interests of your loved ones.

If you have questions relating to any of the points raised in this article, contact Lisa Flaherty or your regular Anderson Strathern contact.

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