What if your last succession hope makes a career change?

Succession planning is tricky business, but what happens when your last hope for succession decides he or she wants a career change? Shakespeare Martineau's Duncan James writes.

Succession planning can be tricky for family businesses at the best of times but constant changes to the family tree as individuals get divorced and re-marry can introduce weaknesses at the level of the next generation. For those affected, important life changes can trigger a desire to re-evaluate their position, which can mean pursuing a change of career.

For family business owners planning for retirement there is nothing worse than finding out that their preferred choice of successor to run the family business in the future has decided to take a step back. At this stage, it could be difficult to persuade them to change their mind and without an alternative member of the family pushing to take their place, the business owner could feel trapped at the helm.

They do have options, however. Even at this late stage it may be possible to bring in an external expert, with relevant sector or management expertise, to support the running of the business with a view to taking up the reins over a period of time. Such hires are likely to require incentives in the form of a competitive salary and share ownership, which may be dependent on performance and length of service.

Alternatively, the business owner could choose to sell all or part of the business. Indeed, if there is no clear path to succession, this could be the preferred means of exit particularly if the business owner is able retain some intellectual property rights for example, which would allow them to generate income from royalty payments in the future. Making the transition to employee ownership could also enable the business owner to realise value in a tax-efficient way, whilst preserving business continuity and ensuring there is a motivating structure for managers and staff going forward.

If the business owner prefers to retain some assets but wants to withdraw from the operational side of the business altogether, another option would be to keep any property as a long-term family investment, while transferring ownership of the business to the existing management team.

To avoid being left in the lurch as they are preparing to exit the business, business owners should make sure they are communicating regularly with potential successors. If an individual’s circumstances change, due to a birth, marriage or divorce, this could trigger a rethink and it is important that the family business owner is aware of this and can intervene appropriately if they think it might help.

To minimise the risk of such disruption to their exit arrangements, business owners should consider taking a preventative approach by taking steps to tie in key family members of other highly-valued managers. They could also take steps to bolster the management team by bringing in a ‘business mentor’ or non-executive director where necessary.

One of the best ways to tie in potential successors and keep them motivated is to put in place a rewarding pay and remuneration package, which comprises an option to assume ownership of a stake in the business, or to assume control of part of the business, once key milestones are achieved. If preferred, the exiting business owner can ring fence existing assets by structuring incentives to ensure the employee only gets a share of any increased wealth. For some families, it can help to put in place a ‘constitution’, which defines roles and responsibilities of individual family members. Ideally, this document should be reviewed and discussed regularly so all involved feel part of the decision-making process.

When considering succession for the first time, there can be a tendency for business owners to want to keep the business in the family, regardless of whether it is making a profit or whether family members want a role in its future. This could be the right time for the business owner to take a step back and think about what they really want to achieve. If the main goal is to protect wealth for the family to benefit from in the future, then a disposal or transfer of ownership could be the best approach.

Duncan James is a partner and family business specialist at Shakespeare Martineau.

Praseeda Nair

Kellen Rempel

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.