Succession Planning for Business Owners & Farmers
Many of our clients own small businesses or have shares or interests in them. However successful the business may be, succession planning is crucial.
Why is succession planning important?
Many clients have spent years of hard work, commitment and money in building up a successful business which they hope will be there for the benefit of future generations. Proper succession planning involves thinking about what will happen to the business if you die, retire or suffer mental or physical incapacity. It can be the difference between a successful business for years to come and one that dies with you.
What does succession planning involve?
The Personal Law Team at LCF Law works closely with our Corporate Team on succession planning because it involves both ensuring that everything is arranged properly while you are alive and also the arrangements if you die. There are generally three aspects involved:
Taking these in turn:
There are two main practical aspects. The first is the arrangements between you and the company should you die, retire or lose capacity. Our Corporate Department is expert in putting all the documentation in place to regulate this. This ensures that you know how your share of the business will be dealt with and that it goes to those you would wish to benefit from it.
The second aspect is the question of who would run the business if you were not there. Owners of small businesses commonly want their children to inherit the business when they are gone. The children might not, however, be old enough or have the experience to run the business. It is important to think about who would run the business on their behalf. For example, some business owners take out keyman insurance to provide funds to ‘buy in’ this expertise. There might also be key employees within the business that are important to its success and we can advise on how to incentivise them to stick with the business and help to run it for the children.
There may also be people in the business, or the children themselves, who could potentially run it but are not quite ready to do so. We can advise on strategies to bring them through and develop their skills so that they are ready to step into the role when the time comes.
When making your will it is also worth considering whether you should appoint ‘special executors’. The executors are the people named in a will who are given the job of dealing with the estate. In addition to the general executors, special executors can be appointed specifically to run the business. These will be people who have the knowledge and experience of business matters generally and of your specific business, such as your accountant or solicitor.
Click here to read an article on our blog about special executors (link) written by our Corporate Partner, Susan Clark.
There are both long-term and short-term considerations in relation to the financial aspects of succession planning for a business.
A common consideration is how you would get your money out of the business if you decided to retire or - if your beneficiaries are not going to continue in the business - how your estate could extract its share if you die. You need to plan ahead to have an exit strategy agreed with any co-owners of the business and put in place financial arrangements to provide any cash when it is needed. It is worth remembering this works both ways. If another co-owner dies you might need to pay out their share of the business without damaging it.
The second common issue for business owners is balancing the interests of the people they want to benefit from their estate. A good example is a situation where a business owner’s entire wealth is tied up in the company and they have some children who work in the company and want to continue to do so, and others who don’t. The challenge can be finding a way to allow the children who want to inherit the company to do so, while still being fair to the other children overall.
This can be particularly important if some of the children have devoted their lives to the family company in expectation of inheriting it. Getting it wrong can easily lead to family disputes, court cases and bad feelings in the family that can endure for generations.
It is a case of taking a step back, thinking through carefully how everything would work and putting in place suitable financial arrangements where they might be needed.
An important part of this is having a properly thought out will to reflect your intentions. We have years of experience of drafting complicated wills for business owners of all types and for farmers.
We have extensive experience of advising business owners and farmers on taxation issues to do with their businesses, including the Inheritance Tax position should they die. An important part of this is understanding how Business Property Relief and Agricultural Property Relief from Inheritance Tax would apply to your business interests. There are many reasons why you need to understand this. For example, without understanding how tax would impact on your estate you cannot be sure how much you would have to give away. Secondly, unexpected tax bills can cripple a successful business. Thirdly, Business Property Relief and Agricultural Property Relief are complex and there are various conditions to qualify for them. We can look at your business and make sure that it is set up in a way that can maximise these reliefs.
A common issue in recent years is that pressures on the farming industry have caused many farmers to diversify into other areas without realising that this could affect the availability of Agricultural Property Relief from Inheritance Tax. We can look at anything you might be considering and tell you if it might have unexpected tax consequences further down the line.
Lasting power of attorney
Another crucial point to consider for business owners is whether they should have a Business Lasting Power of Attorney (BLPA). This is a document enabling you to appoint someone to step into your shoes and run the business, either temporarily or permanently, should you be mentally or physically incapacitated but still alive.
I don’t have time to do succession planning
We understand that running a business takes up much of your time and often other affairs can become neglected. However, the time and expense of sorting out problems for the family later on can far outweigh the time involved in getting things right in the first place. We can do all of the legwork for you to give you the peace of mind of knowing that everything is in order while you get on and run the business.
Succession planning - a wise investment
It may be worth reflecting on the fact that by the time you reach the age of 50 you will have lived through 438,000 hours. Taking a few spare hours for succession planning is surely a wise and relatively brief investment of your time?
To find out more about how the LCF Law team can help and support you with effective succession planning why not get in touch with us today for a chat to find out more?
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