Guide to transitioning ownership of your family business

Many business owners underestimate the complexity involved in transitioning ownership of their business. Typically, ownership transition refers to the process of transferring the financial, legal, and operational control of a business from one party to another.

There are practical steps you can follow to preserve some control over the trajectory of your business both during and after you’ve transitioned ownership. The first such step is a clear and effective business succession plan. Transitioning ownership does not necessarily mean walking away completely, it means transitioning the appropriate and desired level of involvement, while keeping other stakeholders happy.

What is a business succession plan, and why is it important?

A business succession plan involves planning for the future, ensuring a seamless ownership transition when a business owner decides to exit the business in some capacity, whether that be retirement, stepping back from day-to-day involvement in the business, or death or incapacity.

An effective business succession plan provides continuity and mitigates key risks to a business as its ownership transitions, protecting a business’s legacy fostered over years. A solid business succession plan ensures an ownership transition is clearer and easier to follow for all parties involved.

A common misconception is that business succession planning where a business is being passed down a generation only impacts family members, when in fact it impacts the business as a whole. A workforce will value a robust succession plan because it gives them a clear idea of how the ownership transition will affect them. It can retain and attract top talent if a succession plan is clear and compelling, including instilling confidence about whoever steps into leadership, management and owner roles.

Who should be involved in succession planning?

Crafting an effective succession plan requires time and careful consideration, and every business (and its characters) are different. You might want just to make decisions yourself, but having an idea of how other stakeholders will react is important. The plan has to be comprehensive and practical, and recognise that what you want to achieve will ideally keep both family, and employees, happy.

Recognising gaps in the business is crucial, and the involvement of a business’s senior management team provides a holistic view of the business. Identifying critical and specialist roles that will need to be filled after you’ve gone is important.

If a family business is to be passed down a generation, it is important that the future generation are as involved as possible, so they fully understand the plan and how both the business and transition period is to operate. If they are working in the business already, it is crucial they are provided a complete view of the business they are due to inherit to ensure a smooth transition.

Instructing professionals is also an important part of succession planning. Accountants, tax advisers and financial planners will be key in considering the tax consequences of specific options, which such options often drive the decision making. Involving lawyers early is beneficial for creating the legal framework by which the ownership transition will operate and you will ultimate need a lawyer to document the chosen route.

How to create a business succession plan

Starting succession planning is important. A succession plan will likely requirement modification over time as circumstances of the business change, and it may be in existence several years before an owner exits. It is important that business succession plans are reviewed and adapted in line with regulatory, statutory, and internal business changes.

The owner should consider the level of contribution they wish to offer the business, in time and money, after an ownership transition. They also have to consider the timeframes they are working to and what they need in place before they can transition. For example, they may want to leave the business to their children, but they might want or expect one or more of them to be able to step into their shoes, and that takes time (if possible at all). If there is a timeline, an owner, prospective transferees, and workforce have a tangible target to work towards, ensuring all relevant preparations are made in good time.

Establishing any new roles and responsibilities for the successor(s) is important to ensure, both during and after, the ownership transition is as smooth as possible. When a heavily involved owner steps back, retires, or removes themselves from a business entirely, the business succession plan must highlight gaps or specialist positions that require filling. The responsibilities of any incoming personnel must be clear to ensure once the transition is complete the business operates as intended.

Communicating the succession plan with key members of the workforce, and family as relevant, allows the ownership transition to be embraced across the business, or at least where it needs to be. Speaking plainly and openly about the transition is essential when convincing key members of the workforce of the vision and succession plan.

Ownership transitions should be a gradual process. Introducing additional personnel, such as an owner’s children, into a leadership structure allows the new leadership structure time to assimilate respective ideas, perception, and future trajectory of the business. If the next generation is less experienced, gradual integration allows new owners or leaders to be guided and mentored where appropriate and required, ensuring their effectiveness in the long term.

Tools for preserving control

When a business owner understands the level of involvement they wish to have in the business post-transition they can start to consider different structures to best suit their needs. There are various tools and mechanisms that can be adopted to preserve control when transitioning ownership depending on your goals. Subject to relevant tax implications and advice, it is important that any ownership transition is structured in an efficient and clear manner.

One of the main mechanisms when transitioning ownership is for the business to issue separate classes of shares in the company to an incoming owner. Separate share classes can be assigned different rights in terms of voting powers, remuneration, and capital rights on exit. Weighted voting rights can be used to separate the financial benefit and operational control of a business, allowing an owner to sell the majority of their shares while retaining control and influence over key decisions. When passing a business down a generation, weighted voting rights are an effective choice as they allow an owner to pass on financial benefit to their children or family members whilst retaining control with superior voting rights.

Advantageously, rights attached to share classes can be amended. Should you be happy that the successor(s) will continue to lead the business as required, share class rights can be amended to gradually provide more control to the successor(s). Alternatively, as they become more experienced and ready to lead the business with less intervention and guidance, you can transfer the shares with weighted voting rights to the successor(s).

If you choose to use weighted voting rights, precisely outlining the separate rights will be within the company’s articles of association. It is therefore imperative that the articles are drafted to allow further share allotments and distinct share class rights. Imprecise articles can lead to situations that prohibit or hinder a business owner’s chosen succession route. They should be precise, but broad enough to allow you to manage the business as you wish, complementing and facilitating any subsequent exit.

A very useful mechanism for preserving control are shareholders’ agreements. Shareholders’ agreements are entirely bespoke and detail the roles, responsibilities, and restrictions imposed upon each shareholder. They are not available to the public, unlike the articles which can be seen on Companies House. A shareholders’ agreement can be tailored to impose restrictions and safeguards such as with the inclusion of veto rights. Veto rights are an effective tool to maintain control over key decisions within a business. Veto rights that sit within a shareholders’ agreement allow an owner who has transferred the majority, or all, of their business to retain control over decisions and areas expressly stated within the shareholders agreement. There is no restriction, on what can be included as a veto right within a shareholders’ agreement, and as the business moves forward, vetoes can be added, amended or removed from the shareholders’ agreement as necessary. There is no obligation for an ex-owner to remain a shareholder for vetoes within a shareholders’ agreement to be effective. This allows an ex-owner to preserve some control over the business, whilst also benefitting financially from selling or transferring their shares. Examples of vetoes might include having to seek approval from founders to change the name of the company, approving the altering share class rights, spending or borrowing above a certain amount of money, opening a new site of business, or selling part of the business.

When transitioning ownership to family members such as children, shareholders’ agreements can be drafted with certain protections against actions that may cause harm to the business. One such protection could be share clawback provisions. The bespoke nature of shareholders’ agreements provides owners the capability to compel successors to act in a certain way, under the proviso that should they not, they can be forced to sell them back. This means you could sell or transfer all of your shares to a successor safe in the knowledge they will act in the prescribed manner, or you will receive your shares back if they do not.

The mechanisms described above are not mutually exclusive, and you can incorporate any number of them into your business succession plan according to your and your business’ needs.

Best practice tips for effective succession planning

When business succession planning, particularly when transitioning ownership down a generation, adopting good practices is crucial to ensure any plan is adaptable, robust, and well-structured.

Start Early – Starting early is essential in business succession planning and allows for sufficient time to develop a well-structured succession plan.

Clear governance documents – Effective and well-drafted articles of association, shareholders’ agreements, and other governance documents allow for ownership transitions to be conducted as intended.

Clear vision – Business owners should have a clear idea of what they want an ownership transition to look like, particularly what level of involvement they wish to contribute post-transition.

Be dynamic and adaptable – Business dynamics constantly change. Remaining adaptable and ready to act is paramount for any business succession plan.

Involve professional advisors – Planning ownership transitions can be an emotional and turbulent time, especially when you have started the business. Share the burden with professional advisors who can guide you in places you may not have precise knowledge of.

Transparent communication – Considering the wider workforce is essential. An ownership transition does not just affect family members or senior leadership and workforces should be kept up to date as regularly as is practicable and appropriate.

Gradual integration – Ownership transition is a pivotal event in an owner-managed business. Any such transition should be gradual, potentially spread over years, to ensure any negative impact on the business is minimal.

Avoid sympathy roles – If you wish to be succeeded by your children, or other family members, it is important that their roles within a business are earned, and not assigned by obligation or sentiment. Roles assigned solely by familial bond may have an adverse effect on senior employees that do not feel family members have earned their position. It is key to consider whether a family member has the necessary skills to fulfil the role they are to be placed in before it happens.

What Moore Barlow can do to help

We understand stepping back from a business you have built can be an emotional and difficult decision. Our expert team blends comprehensive legal and commercial knowledge when supporting the ownership transition of a family business.

Through whichever mechanism a business requires to transition, we can help. Whether updating articles of association, or drafting bespoke shareholders’ agreements to facilitate your exit, our team is experienced in navigating the nuances of a family businesses transitioning ownership.

Beyond ownership transitions, our team is well versed in all facets of corporate work, from mergers & acquisitions, restructuring, corporate governance, employee ownership trusts, management buy-outs and company secretarial work.