Business Succession Planning
Forging long-term relationships
Delaying strategic succession planning – and the legal process that may accompany it – can create commercial uncertainty and unwanted personal headaches in years to come.
From the outset, it is important for individuals to consider their personal aims and ambitions. Everyone involved in the business needs to understand what they want to achieve for themselves, their families and the business, before considering how these objectives will work alongside the plans of their business partners and family.
Is there a medium-term plan for individuals to retire from the business completely? Is there a vision of passing the business down through the generations of one or more families? Are shareholders looking to sell the company? Are there successors already in the business?
The answers to all of these questions will be tailored to individual circumstances and the goals of those involved. However, one rule does apply whatever the business and whatever the circumstance: It is never too early to plan.
What is business succession planning?
This is not just about sale or retirement. We work with businesses through their lifetime from start-up through to sale, anticipating and adapting to changing scenarios.
Typically, we will look at ownership structures, shareholders’ agreements, new or revised articles of association and cross option agreements, but it’s not really about the documents. In the business succession planning team at Higgs LLP, we see our role as an independent legal consultancy for owner-managed businesses who are considering matters regarding the ownership and management of their company now and in the future.
That may be getting a framework in place at the outset of a new venture or looking to implement a smooth and seamless transition when making important changes to the structure of a company.
We act for many business organisations including limited companies, guarantee companies, LLPs, partnerships and unincorporated associations. Each set of documents will be bespoke to a particular set of circumstances. Every business – and every individual involved in them – is unique and we will use our experience to support owner-managers in creating the best solution for each scenario.
Below are examples of the most common documents which will be drawn up in relation to a limited company during the succession planning process.
The succession planning process
We put you in control of the process. Our what if? approach considers situations and issues which in our experience are important to owners and managers of businesses, and we ask you to consider, discuss and agree what you would want to happen in given scenarios. Only when we understand your particular objectives and requirements can we work with you to create the appropriate solutions.
The most important aspect at this stage is to get a clear understanding of the thinking of all parties. Where necessary, we also work collaboratively with business owners’ other advisers to help facilitate these discussions and develop a joined-up plan for the future.
We also review the current position in relation to your company’s constitution, any shareholders’ agreements and related personal arrangements. That enables you to see how closely the existing position represents what you believe it to be, or would want it to be.
Where we help you put in place new or revised documents, we work closely with you to ensure that you fully understand them (they are your documents, not ours) and that they give you the peace of mind you need.
Proper planning is not a one-off exercise. Commercial developments, changed objectives or life events should always be a trigger for a sense-check of your arrangements. We aim to work with businesses for the long-term, and a review at regular intervals allows for flexibility and may provide additional planning opportunities.
Benefits of succession planning
The earlier the goals and targets of everyone concerned can be identified, the better. Often, delay can further complicate issues and narrow the number of options available.
Through early planning, we can implement changes to suit owners’ business, family and personal requirements and avoid unwanted surprises.
What is sometimes overlooked is that, even if little thought has been given to some of these issues, there are default rules which will apply. The problem is that business owners may not know what those rules are, and it is likely that they do not operate as the owner would wish. That in itself is often a valuable and enlightening exercise which prompts owners into action.
What rights do shareholders have to transfer their shares during lifetime and on death? What happens to their shares if they leave the business? If a dispute arises on a key issue, who has the final say? Does the business owner know the answers to these questions, or even know where to find them?
From a legal standpoint, provisions in the company’s Articles of Association and any Wills or Shareholders’ Agreements that have already been put in place may include answers to some of these questions. Are those documents accurate and up to date? A good starting place is often to understand the existing arrangements and whether they are fit for purpose. The answers can often be surprising.
There are often wider benefits to our succession planning discussions. It may raise issues regarding individuals’ personal objectives and priorities, and allow co-owners to explore matters they had not previously considered.
Putting these issues back into the difficult box is rarely a good approach. There is considerable flexibility to adapt the rules which apply to business and personal arrangements. By considering these situations before they occur, business owners can control those eventualities, rather than finding out to late that things were not as they had hoped.
Latest successes
Articles of association
This is a public document which is filed at Companies House and contains rules regarding shareholdings and the operation of the company.
Every limited company has one. Not every company understands the implications of the rules. It is the first port of call when disputes arise – and that shouldn’t be the first time a shareholder or director considers them!
We provide peace of mind that the articles are aligned to the owners’ plans and requirements.
Shareholders’ agreements
In contrast to the articles, this is a private document which outlines how the company should be operated and the rights and obligations of shareholders.
Shareholders’ agreements can contain a huge variety of provisions to reflect the particular circumstances of the business and the individual shareholders. Typical issues that are often addressed include provisions regarding share transfers, safeguarding for minority positions and appropriate ways to address disputes.
While any such document must work in conjunction with the Articles, the fact that a shareholders’ agreement is not on the public record means it is more suitable for any personal or commercially sensitive arrangements.
Cross-option agreement
In some situations, on the death of a key shareholder the preferred outcome is for surviving shareholders to assume ownership and control of the company, with the estate of the deceased receiving a fair value for the business interest.
A cross-option agreement is an effective structure to achieve this objective, with both the continuing shareholders and the estate having the right to call for the sale of the shares at the relevant time.
It is natural for business owners to want to protect both their family and the business in the event of their death. Careful consideration needs to be given to the price or valuation mechanism and methods of funding the arrangement – including insurance policies where available.
Family charter
Family businesses bring their own unique dynamic and relationships and, in contrast, the intention here may be to retain the ownership and management of the business for future generations.
A family charter may include legally binding aspects, but more importantly provides a framework of long-term principles regarding the relationship between the family and the business.
It can be an effective way of defining roles and expectations and ensure relations remain harmonious within the company and the wider family.
Types of business we work with
We also work with businesses in many other structures including partnerships, limited liability partnerships and unincorporated associations. There will be documents specific to those organisations, but the same themes will be relevant. What is most important is that any suite of documents reflects both personal and commercial needs. In each case we help owner-managers ensure the arrangements support their plans for the future of the business, whatever those plans might look like.
Common pitfalls
The biggest mistake business owners make is simply not addressing matters properly, or at all. Delaying discussions on these important issues rarely produces a satisfactory outcome in the long-term. It is storing up potential future conflict or perhaps means that solutions which were available are no longer achievable.
Not taking action is in itself a decision. It can be overlooked that no company will start this process with a blank sheet of paper. There will be a current or default position which will apply. In our experience, in many cases owners of businesses will not be aware what that is, and it may not be what they would expect or want.
One of the areas that is often overlooked is the importance of discussion and agreement surrounding future transfers of shares either during a shareholder’s lifetime or following their death. For example, the current shareholders of the company may intend to pass the business to their children and, if this is what they plan, it is important that the children and any other shareholders are aware and part of the process of planning for that future.
Plans are much more likely to succeed if they are shared with, and agreed by, the other interested parties, whether that be a business partner, family members or other persons within the business. There may be clear consensus or some individuals may have very different visions of the future. In either situation, informed conversations at an early stage are key to ensuring everyone’s expectations are met.
Reaching a consensus is vital and the earlier these discussions begin, the easier it becomes to reach an agreement which will suit all parties.
Family-owned businesses
There is no such thing as a typical family business, just as there is no such thing as a typical business or a typical family. However, family dynamics and personal relationships within a business bring particular opportunities and challenges.
Research consistently tells us that family businesses don’t have effective succession plans in place. It goes back into the difficult box, or everyone is too caught up in the day to day doing and default to focussing on the business rather than the family in the business.
Where everyone is on the same page, many things fall into place, but it would be wrong however to assume that all family members are bought into the same common purpose.
What does success look like for the family and the business? Is there a shared vision or is there a collection of disparate and competing ideas? Can those differing views and contributions be reconciled?
Family bonds may produce stronger and more effective working relationships and provide real competitive advantage. Yet it can be difficult to separate the two. Personal challenges become challenges for the business.
The passing of ownership and wealth does not necessarily equate to the need for a future owner to perform all, or indeed any, key management functions in the business. It is critical to examine the needs of the business as against the strengths and perhaps weaknesses of successors.
All of this means there is a critical need for honest and open conversations. That will determine whether the essence of the family business can be turned to its advantage or becomes a burden and a distraction.
The best plan will acknowledge the needs, wishes and strengths of the individuals and the strategic requirements of the business. The overlap between the two is key. If they can be aligned, the environment will be in place for the family and the business to flourish for future generations.
Our approach
In the business succession planning team at Higgs, we see our role as an independent legal consultancy for owner-managed businesses who are considering matters regarding the ownership and management of their company now and in the future.
That may be getting a framework in place at the outset of a new venture or looking to implement a smooth and seamless transition when making important changes to the structure of a company.
There is no ‘one size fits all’ approach here. We understand that no two businesses or families are entirely alike and aim to share our experience and technical knowhow to help business owners understand and evaluate the options available to them in a wide range of potential scenarios. This includes proactive planning for desired outcomes but also contingency options if events take an unexpected turn.
With that in mind, we have created a ‘What if?’ document which poses some of the questions business owners might want to consider in the context of succession planning.
These could include:
- What do you want to happen to your shares on your death?
- Who should decide whether to sell the business?
- What should happen if the parties fall out?
This is designed to cover a wide range of potential scenarios and pose questions of all individuals involved which may – or may not – have been on the radar previously.
It is a vital part of the process as it provides an insight into the everyone’s thinking and allows us to begin constructing a suggested plan – and ultimately the legal framework - to help future-proof the business. We believe this then gives individuals the power to make decisions with confidence which suit them and their business.
By posing ‘what if?’ scenarios, we are unable to prompt business owners to consider broader issues regarding everyone's needs and expectations. This may start with a high level view of the family’s core values and priorities, which may then flow into what is in the best interests of the business. It creates transparency and may achieve a consensus which would not be possible after the event.
Why choose us as your succession planning lawyers
We understand owner-managed businesses and create bespoke solutions based on a wealth of experience.
We say it’s not about the documents – something you may not expect a lawyer to say. Of course, the result of the process is likely to include a suite of documents and we take every care to ensure they work to achieve a business owner’s objectives. What we mean is that often the discussion and decision-making process is the most valuable aspect of what we do.
Our ethos as a team is to keep the process as simple as possible for everyone involved. There is no escaping, especially from a legal perspective, that succession planning can be technical.
We break down what can be complex terminology to help business owners focus on the key principles that matter to them and their families and ensure that the documents and processes are tailored to reflect their personal and commercial needs.
A plan should be a living thing. It may need to be updated to reflect the growth and development of the business in the years to come, changed priorities and objectives or new personal or family situations.
That’s not to say it should be checked every day, week, or month. Best practice would be to review arrangements at agreed intervals. Our recommendation would be an annual check but, at the very least, we would suggest every other year.
It doesn’t need to be a root and branch review on every occasion. It may be there has been a period of stability for the business and there have been no, or very few, notable changes. However, the equilibrium of an agreement can very easily be changed – perhaps through significant changes to the business, the introduction of a new shareholder or an owner either getting married or having a child.
A successful succession planning exercise is never complete. It should always be an ongoing process, and we will be on hand to support you.
Meet the succession planning team
Paul Hunt
Partner and Head of Business Succession Planning
Elizabeth Wood
Senior Associate - Business Succession Planning
