As previously covered in a blog on the fundamentals of succession planning, nothing really beats consistently-maintained succession planning that is begun early in the company’s life. Once the need for succession planning is realised, how can companies best prepare for a handover of control?
Anyone forming a company will ideally have a clear idea of what the company’s purpose is, and how it will carry that out. For example, a plumber may well be advised that it would sensible for them to incorporate rather than act as a sole trader; that advice will probably be correct. On another level, two companies may decide to co-operate, bringing different strengths to a joint venture (“JV”) to break into new markets. In either case, it is highly likely that the two new companies will have a finite life. The plumbing business will last for as long as the plumber needs it to (profit, career changes, illness or retirement may all affect this), while the JV is more likely to have a specific timescale attached to its business plan by the two shareholders.
Which company is more likely to have a succession plan in place?
Of the two companies in this example, it is more likely that the JV will have a plan in place, considering relative resources, expertise and access to advice. However, this is not to say that the sole trader plumber needs a plan any less than the JV.
Many small businesses are established without having access to the knowledge or advice that will allow them to consider this early on. As such it seems highly likely that smaller companies that are less well-resourced and perhaps less well-run (in an administrative sense at any rate), will only consider this when they are forced to, by which point it may be too late.
The starting advice to a smaller company must be to “consider the future” as early as possible. In particular, companies operated by family members or business partnerships between friends often opt to resolve issues of succession internally. However, it is these companies that are more likely to fall foul through lack of formal succession planning if an unplanned terminal event occurs.
For larger private companies, a shareholders’ agreement may be considered. Provided it covers the appointment and resignation of directors, and the transfer and transmission of shares, a shareholders’ agreement is probably the single most effective document a company can have. Ideally, it should address the circumstances noted above in some form, perhaps with deemed transfer provisions supported by good and bad leaver valuation.
An alternative could be ensuring that the articles of association are fully up to date and that any personal circumstances are clear. This may be evidenced perhaps by a new or updated Will and a business plan stating their future intentions. Either of these (and preferably both) should serve to demonstrate how the company can face the future in their absence.
Over and above the foregoing, the simplest and most effective thing any individual can do is to obtain the relevant legal and tax advice in due time. This will help the succession go more smoothly, reducing the chances of disputes or uncertainty amongst the various beneficiaries, or intended successors, and minimising the tax liabilities for everyone involved.
It is apparent that having a plan that involves other people, especially for a scenario in which the company might be missing its most important person, is really crucial. It is the responsibility of every sole director, and particularly those who are also the sole member to ensure the continuity or even the conclusion of their company.