You've built a business that works, and at some point you'll want to step back from it. Succession planning for a small business comes down to two questions, who will run it after you and who will own it, and then to getting the business ready for the answers. It's easy to put off while you're busy running things. It tends to come up when a health scare or a big birthday makes it hard to ignore, and by then the choices can be narrower than they'd have been five years earlier.
Much of what's written about succession planning is for large organisations, about building a line of people for senior roles. For the owner of a small company the question is closer to home, because the business is yours and the person who takes over may be sitting in the next office or across your kitchen table. This guide is for owners of small companies in the UK who are starting to think about it.
Who runs it and who owns it are separate questions
Owners often treat succession as one decision, but there are two. One is management, meaning who runs the business day to day once you step back. The other is ownership, meaning who holds the shares and carries the risk.
The answers can be different people, and often are. These are some of the combinations that work for small businesses.
| Who runs it | Who owns it | How it usually comes about |
|---|---|---|
| A manager you've developed | You, for now | You step back from the day to day and keep the shares, perhaps selling later |
| Your managers | Your managers | A management buyout, usually funded partly by a lender and partly by you waiting for some of the price |
| A son or daughter | Your family | Shares passed on by gift, by sale or under your will |
| A manager | Your family | The family keeps the shares but nobody in it wants to run the business |
| The buyer, or a manager they appoint | A buyer | A sale of all of it, or of part now and the rest later |
| A manager | Your employees, through a trust | A sale to an employee ownership trust |
Looking at the two questions separately opens up options. If none of your children wants to run the business, it can still stay in the family with a manager in charge. If your best manager can't afford to buy it, they can still run it for whoever owns it next.
Start with what you want from the next few years
Before you choose anyone, be clear about your own plans. Write a few things down.
- When you'd like to stop working full time, and whether you'd keep a role.
- How much income you'll need, and whether it has to come from the business.
- Whether you'd like the business to stay in the family, or would rather sell it.
- What matters to you beyond the money, such as your team and the name over the door.
Our guide to choosing an exit strategy goes through the routes out of a business in more detail. This guide is about the people and the planning behind whichever route you pick.
Developing a manager to run the day to day
Whatever you decide about ownership, a business that someone else can run is easier to pass on. A buyer will usually pay more for it, and a family member inherits something that works without you. Developing the right person takes time, which is the main reason to start early.
Finding the person
Start by looking inside the business. Someone who already knows your customers and your team has a head start, and promoting from within shows everyone else there's a future for them.
If there's nobody suitable, you may need to recruit from outside. That can unsettle people who hoped for the job, so explain your reasons to the team. Look for someone who can lead people and who wants the responsibility. Being excellent at the job they do now is a different thing.
Handing over in stages
Hand over one area at a time, and let them make decisions, including some you'd have made differently. One way to order it is this.
- The day-to-day running of the team, such as rotas and recruitment.
- Suppliers and purchasing.
- Customers, starting with the ones you're least involved with.
- The monthly figures and the bank.
- Pricing and the bigger decisions, with you as a sounding board rather than the final word.
Write down what's in your head as you go. That includes how you price work, where the passwords are kept, who to ring when something breaks and which customers expect a call from you each year.
Keeping them
A manager who's ready to run your business will have options elsewhere. Pay matters, and so does a reason to stay for the long term. Some owners pay a bonus tied to profit. Others offer the chance to own shares later, which brings its own tax rules, so talk to your accountant before you promise anyone shares.
Testing it before you rely on it
The best test is time away. Take two weeks off without checking in, then a month. Note what still came back to you, and fix it before the next time.
Choosing who will own it
Once you know who could run the business, the ownership question gets easier, because every route depends on the answer. Our exit strategy guide weighs the routes against each other. From a succession point of view, this is what each one asks of the people involved.
- Keeping it, with a manager in charge. You stay the owner and take dividends, and the manager runs the business. It suits owners who don't need a lump sum and can live with the risk. If you stop being a director or employee, a later sale of your shares might not qualify for Business Asset Disposal Relief, which needs you to have worked in the business for the two years before a sale.
- Passing it to family. This works best when the person taking over wants to and has the skills to. With more than one child, think early about fairness between them. One approach is to give the business to the child who runs it and other assets to the others. Another is to give everyone shares, with the votes held by the one who runs it. Gifts of shares can bring Capital Gains Tax and, if you die within seven years, Inheritance Tax, though reliefs can reduce or defer both.
- Selling to your managers or employees. A management buyout lets your managers buy the business, usually with a lender's help and with part of the price paid to you later. A sale to an employee ownership trust does something similar for the whole workforce. Both need a team that can run the business without you, which is where the manager you've developed comes in.
- Selling to someone else. A sale to a competitor or an investor can give you the cleanest break, and a business that runs without you is easier to sell and worth more. Some buyers want you to stay for a handover, and some buy part now and the rest later. Our guide to preparing a business for sale covers the work that adds most to the price.
An emergency plan for the business
Every succession plan needs a short-notice version, for the day illness or an accident stops you working. Without one, a small business can stall quickly, because nobody else has the authority to make decisions.
If you're the only director
A private company must have at least one director, and at least one of its directors must be a person rather than a company. If you're the only director and you're suddenly unable to act, nobody may be able to sign contracts or approve payments for the company. Appointing a second director, even part time, closes that gap.
If a sole director dies, the shareholders can appoint a new one. Where the director was also the only shareholder, the standard model articles for private companies let the personal representatives of that shareholder appoint a director. Check whether your own articles say the same.
A lasting power of attorney
A lasting power of attorney for property and financial affairs lets people you choose make decisions about your money and property if you can't, and for an owner that includes the shares. Being a director is a separate role under the company's articles, so ask your solicitor how the two fit together. Registering a lasting power of attorney takes 8 to 10 weeks if there are no mistakes, so it needs doing well before it's needed.
Your will
Your shares pass under your will. If you die without one, the law decides who inherits them, which may not be who you'd want owning the business. Make sure your will matches your succession plan, and that whoever inherits knows who can run things in the meantime.
The practical things
- A second signatory on the business bank account.
- Passwords, key contracts, insurance policies and supplier contacts, written down and kept somewhere safe.
- A short note for your manager on what to do in the first week.
- Insurance such as key person cover, if the business would struggle without you. An independent adviser can explain the options.
- If you have co-owners, an agreement on what happens to a shareholder's shares if they die or fall seriously ill.
Timing your succession plan
A succession plan can take several years to carry out, so the earlier you start, the more choices you have. Bringing on a manager or a son or daughter can't be rushed, and neither can reducing how much the business depends on you.
Tax affects the timing too. Business Asset Disposal Relief needs its conditions to have been met for the two years before a sale. Business Relief from Inheritance Tax needs you to have owned the business for at least two years, and a gift of shares can be looked at again if you die within seven years of making it. Your accountant can show you how the timing of each route changes what you and your family keep.
Write the plan down
A plan that lives only in your head won't help anyone if you aren't there to explain it. It doesn't need to be long. A few pages can cover it.
- Who will run the business, and how and when you'll hand over.
- Who will own it, and by which route.
- What happens in an emergency, with names and phone numbers.
- Where your will, your lasting power of attorney and the company's documents are kept.
- When you'll next review it.
Tell the people the plan depends on, starting with your manager and your family. Look at it again every year, and whenever something big changes, such as a key person leaving or a change in your health. If you'd like a sense of how ready the business is, our five-minute readiness check asks about you and the business rather than the price.