According to data from the Institute for Family Business (IFB), 85% of businesses in the UK (4.8 million) are family-owned, with a vast majority of these considered to be SMEs. Additionally, family-owned firms employ 13.4 million people, which is 50% of private sector employment. But in the event of a CEO stepping down, dying or becoming incapacitated, are these businesses prepared?

“The problem in many cases is the very use of the word ‘succession’,” says Hannah Harris, UK Family Business Leader at PwC UK. “Often the founder or current leader – who may well be a patriarch or matriarch and head of the family as well as head of the company – doesn’t want to retire when they perhaps should. Equally, those in junior positions don’t know how to start the conversation or move towards a strategy to deal with it.”

A starting point, Harris says, is to avoid calling it a succession plan because it “makes people think of their own mortality, invokes complex emotions and it immediately puts the discussion on an uncomfortable level”. Instead, Harris believes that it should be called a continuity plan.

“All companies ultimately want to survive – and that requires clear-headed thinking,” she says. “If your starting point is ‘what do we do when dad dies?’, it’s not going to resonate with anyone and will not lead to a good plan.”

Tax specialist Pete Miller, who founded The Miller Partnership in Leicester, says that the first thing family-owned businesses should do is consider how the succession is going to occur. “You might have a management team, which may or may not include a certain number of your children,” he says. “There are recognised structures for ensuring the business can continue without necessarily having a huge amount of cash in the company.”

In practice, this means the money can be allocated from future profits. “You might agree that the retiring CEO receives a proportion of the money after three years, and the rest after five years, for example,” explains Miller.

This immediately makes the cash flow of the company a pressing concern. It also helps explain why some CEOs are reluctant to absent themselves entirely after supposedly leaving – they can be concerned that they won’t get what they’re expecting if the business takes a turn in the wrong direction.

In recent years, as Harris points out, management buy-outs have increasingly become the most common form of succession, because, she says, “it’s no longer the case, let alone the assumption, that family members will want to continue the family business out of necessity”.

The second option, according to Miller, is questioning if they would sell to a third party: “This wouldn’t necessarily be a management buy-out structure and in effect wouldn’t be a deferred payment scenario.”

Businesses need to make sure they have an understanding of exactly what they are selling, says Miller. To understand this, he uses an example of a pharmacy that has been in a family for several decades. “It might have built up a portfolio of residential properties over those years, as you recycle the profits from the company in a resourceful way.”

He says the business needs to think about the purchase of that pharmacy: “What exactly are you buying? Does the buyer want the rented properties, and does the owner want to sell? You might take the properties out of the trading company, in advance of putting the company up for sale.” All of this needs to be sorted out well in advance of the sale, he adds. “The tax arrangements are going to be different. You don’t want to be doing these things the day before.”

Thinking about things early gives you increased options. For instance, you can do things years ahead of the potential succession.

“There are a number of strands,” says Peter Rayney, a Chartered Tax Adviser. “Once you know whether you are in a management buy-out or family succession position, the parents might want to give some shares to their children during their lifetime. That can be accomplished on a tax-friendly basis and there should be no tax to pay, providing certain considerations are in place.”

How does this work? Rayney explains there’s gift holder relief on these shares; whereas if you pay for shares, there’s usually income tax charged. This shouldn’t apply to family members.

He says that businesses need to be aware of the fact that the best tax solution may not be the best one for them: “If you don’t show some incentive for the next generation now, they may become disenfranchised and – in an extreme scenario – may leave the business altogether because they perceive you are not looking after them properly.”

“Unexpected or unplanned for death can have far-reaching tax and business implications,” says Claire Evans, Tax Partner at Deloitte. “If a company hasn’t fully understood the estate’s tax position and plans are not in place to secure business tax reliefs, an unforeseen inheritance tax bill could lead to substantial financial implications for the business.”

If there is no will, Evans says that the assets “need to be distributed according to the predefined rules of intestacy, which decide how the estate will be shared out”. She explains that these will almost certainly create tax inefficiency and, additionally, the distribution of the estate is unlikely to meet shareholders’ wishes and may not be in the best interests of the business. Properly thinking through the will and expression of wishes provides certainty on the company ownership and can help avoid family conflict going forward.

What happens if there is a sudden death and things have not been put in place as they should have been? “At least know what the contingency plan is,” says Rayney. “In practice, this means knowing who will take over.”

A good owner-manager will mentor someone in the business for this. “Ideally, don’t be in a position where one person is indispensable; someone else needs to know how to take the reins,” Rayney adds.

It’s important for owner-managers, younger family members or other senior employees to understand this. “In extreme situations, companies can collapse because everyone is in a headless chicken scenario. You can use that scenario to demonstrate how important it is to have a robust succession plan in place.”

“It’s harder for SMEs,” Harris says. “This is because often with families you don’t have the board set-up that you have in corporates where it’s easier and clearer to make decisions that benefit the organisation.”

She adds that often the founder or CEO’s identity is wrapped up in the organisation – this is another reason why it can be hard for them to leave or step down even gradually.

Evans says: “As difficult as these conversations might be for families and family businesses, they need to be open, honest and thorough.” Owner-managed businesses “should consider creating an agreement that sets out rules and protocols in terms of ownership, governance and employment of family members, along with other relevant policies to help ensure a smooth transition”.

According to Evans, having a blueprint that is regularly reviewed “will reduce uncertainty and aid business leadership and continuity”.

Think ahead: “Have these perhaps difficult but vital planning conversations early on,” says Claire Evans, Tax Partner at Deloitte. “It’s so important to be on the front foot. Actions should be carefully thought through and deliberate rather than kneejerk or crisis-driven.”

Have a written plan: “It doesn’t have to be in huge detail,” says Peter Rayney, a Chartered Tax Adviser. “It can be a sheet of paper with bullet points and timelines, addressing complexities that might exist, such as multiple owners who want to come out of the business at different times.”

Timelines are critical: “If an owner wants to leave on a particular date, and then draw their money out of the business at a specified date after that, ensure your cash flow projections are robust,” Rayney adds.

Choose the right adviser: “Obviously, every business should have a good general practice accountant working for it,” says Pete Miller, founder of The Miller Partnership. “But when it comes to succession plans, you may need a specialist. You can have a highly competent accountant for your accounts, but when it comes to disposing of the company, you may need someone different.”

Avoid doing nothing: “Estate planning is vital in ensuring companies are prepared for what might happen and can make appropriate plans, such as taking insurance measures or agreeing credit lines,” says Evans.

Fashion brands including Louis Vuitton, Prada and Versace have all had highly publicised family succession battles over the years. Initially, Dolce & Gabbana had appeared to be going for the simplest option by claiming that they planned to wind the business up entirely on retirement.

If this seems drastic, it’s perhaps reassuring to discover that business partners Domenico Dolce and Stefano Gabbana have recently announced a succession plan for the business, with the Dolce family set to inherit.

The deal, announced at the end of last year, “will preclude selling to investors or bringing in other creative directors”, according to Vogue Business.

The firm has always been family-oriented, with Dolce’s parents involved soon after its founding in 1985. Brother Alfonso is CEO and sister Dora handles R&D. The co-founders control 40% of private-held shares, and the rest of the family controls 20%. The company reported €1.35bn in revenues in 2018-19.

• Family Business UK’s website, which provides UK-based resources and features for family businesses
• Family Business United’s website has further resources and useful features for family-run businesses
• The CIPD has resources on succession planning
• Human resources consulting firm Robert Half provides advice on succession planning
• Forbes article on succession planning: 7 Steps To Successful Succession Planning

The ICAEW Library & Information Service provides full text access to leading business, finance and management journals, as well as a selection of key business eBooks. Further reading on succession planning is available through the resources below.