Succession Planning for the Family Business

Succession planning is the single most important thing a family business can do to prevent disputes. Specifically, succession is the most common cause of family business disputes by a wide margin. As a result, families that plan succession well typically avoid the most serious form of family business conflict. Importantly, succession planning is not a single decision. By contrast, it is a multi-year process that addresses leadership, ownership, governance, tax and family dynamics together. Crucially, the families that handle succession best start the process a decade or more before the transition itself. As a result, succession planning is a long-term commitment rather than a short-term project.

This page explains what succession planning involves, what it should cover, when to start, and how to handle the common challenges. Specifically, it covers leadership succession, ownership succession, the role of the founder, the next generation, the tax implications and the dispute risks that good succession planning prevents.

Why succession is so often a source of disputes

In short, succession produces disputes because it surfaces every issue the family had been able to avoid. Specifically, while the founder is active, many questions can be left informal. By contrast, the moment the founder steps back or dies, the informal arrangements have to be replaced with formal ones. As a result, every unresolved question surfaces at once.

Importantly, the typical succession dispute involves several layered issues. First, who leads the business. Second, who owns the business. Third, on what terms. Fourth, with what governance. Fifth, with what role for those who do not take over. Crucially, these are not independent questions. They are connected. As a result, succession planning has to address all of them together. For the wider context, see the common causes of family business disputes.

The two dimensions of succession

Crucially, succession in a family business has two distinct dimensions. Specifically, leadership succession and ownership succession.

Leadership succession

First, leadership succession is about who runs the business. Specifically, who takes over as managing director, as chair, as head of operations, and as the public face of the company. Importantly, leadership succession is a question of competence and credibility. By contrast, it is not necessarily about who owns the most shares. Crucially, the best leader of the family business may not be the eldest child, the founder’s preferred successor, or the family member with the largest stake. As a result, leadership succession needs to be approached on its merits.

Ownership succession

Second, ownership succession is about who owns the business. Specifically, who inherits the shares, on what terms, with what voting rights, and with what tax consequences. Importantly, ownership succession is a question of family fairness, tax efficiency and long-term governance. By contrast, it is not necessarily about who runs the business. Crucially, the two dimensions can and often should be separated. As a result, the best leader may receive a smaller ownership stake than family members who do not work in the business.

For the wider framework, see the three circles model, which explains why leadership, ownership and family belong in different circles.

When to start succession planning

Importantly, the right time to start succession planning is much earlier than most family businesses think. Specifically, the families that handle succession best typically start the process ten to fifteen years before the founder’s expected retirement. As a result, the next generation has time to develop, the founder has time to step back gradually, and the structures can be put in place without pressure.

By contrast, families that start succession planning a year or two before retirement usually struggle. Specifically, there is not enough time to develop the next generation, the founder cannot step back gradually, and the tax planning options are constrained. Crucially, the worst time to start succession planning is after a health event, a death, or a dispute has already triggered the question. At that point, the family is making major decisions under pressure and without the time to do them properly.

The three-stage succession process

By contrast, well-handled succession typically follows a three-stage process. Specifically, the stages are these.

Stage one: planning and development

First, the planning and development stage. Specifically, this is when the family articulates its succession intentions, the next generation is developed, and the governance structures are put in place. Importantly, this stage typically lasts five to ten years. As a result, the family has time to think carefully about each element rather than being forced into hasty decisions.

In practice, the planning and development stage includes the following. First, the family agrees what the succession plan is. Specifically, who will lead the business, who will inherit ownership, and on what timetable. Second, the next generation is developed. Importantly, this typically includes outside experience, formal training and graduated responsibility within the family business. Third, the governance structures are put in place. Specifically, the shareholders’ agreement, the family constitution and the family forum are established. Fourth, the tax planning is addressed. Crucially, the early tax planning often produces significant savings that would be unavailable closer to the transition.

Stage two: transition

Second, the transition stage. Specifically, this is when the founder begins to step back, the next generation takes on more responsibility, and the ownership begins to transfer. Importantly, this stage typically lasts three to seven years. As a result, the transition is gradual rather than sudden. Crucially, both the founder and the next generation have time to adjust.

In practice, the transition stage includes the following. First, the founder steps back from operational responsibility. Specifically, the next generation takes over day-to-day management, while the founder retains a strategic or chair role. Second, the ownership begins to transfer. Importantly, this is often done through a combination of gifts, trusts and lifetime transfers, depending on the tax position. Third, the founder’s role narrows progressively. Crucially, each step should be planned in advance rather than improvised.

Stage three: completion

Third, the completion stage. Specifically, this is when the founder fully steps back and the next generation takes over completely. Importantly, the completion stage usually involves the founder retiring from the board, completing the transfer of ownership, and stepping out of the executive role. As a result, the next generation runs the business in its own right.

Crucially, the founder’s role after completion is itself important. Specifically, the founder may retain an emeritus role, a non-executive directorship or a consultancy. Importantly, what matters is that the role is real but not executive. By contrast, founders who try to retain executive influence after completion typically undermine the next generation. For more on this, see the founder problem.

Developing the next generation

Importantly, developing the next generation is one of the most under-invested aspects of succession planning. Specifically, many family businesses assume that the next generation will be ready to take over simply because they have grown up around the business. By contrast, this is rarely the case. Crucially, the next generation usually needs deliberate development to be ready.

In practice, the most effective development programmes include the following. First, outside experience. Specifically, the next generation should spend three to five years working outside the family business before joining it. Importantly, this builds credibility, develops skills, and gives the next generation a basis of comparison. Second, formal qualifications. Specifically, an MBA, a professional qualification or a postgraduate degree provides the technical foundation. Third, graduated responsibility within the family business. Importantly, this means starting in junior roles and progressing on merit, not parachuting in at senior level. Fourth, exposure to the board. Specifically, attending board meetings as an observer well before taking a director role. Finally, mentoring. Crucially, the right mentor for the next generation is usually an outside adviser rather than the founder.

For more on the next generation perspective, see the next generation in family business.

The leadership question: who takes over?

Crucially, one of the hardest questions in succession is who takes over the leadership of the business. Specifically, the answer depends on competence, commitment and family dynamics. Importantly, the most common patterns are these.

Single successor from the family

First, a single family member takes over as managing director. Specifically, this is the most common pattern. Importantly, the chosen successor should be the most competent candidate, not the oldest or the founder’s favourite. As a result, the choice should be made on objective criteria.

Co-leadership between family members

Second, two or more family members share leadership. Specifically, this can work where the family members have complementary skills and a strong working relationship. By contrast, co-leadership often fails where the family members are competing for primacy. As a result, this pattern needs to be designed carefully, with clear roles and decision-making processes.

Non-family leadership

Third, a non-family leader takes over. Specifically, this is the right answer where no family member is sufficiently qualified or committed. Importantly, the non-family leader needs strong support from the family ownership. Crucially, the non-family leader works best where the family has clearly delegated executive authority but retains ownership and ultimate governance. For more on this, see the role of the non-executive director.

Sale or external transition

Finally, the business is sold or transitioned to external owners. Specifically, this is the right answer where the family does not have a viable internal succession path. Importantly, the decision to sell is itself a succession decision and should be made on a planned basis, not under pressure.

The ownership question: who inherits the shares?

By contrast, the ownership question is separate from the leadership question. Specifically, ownership decisions involve different considerations. Importantly, the main patterns are these.

First, equal shares to all children. Specifically, this is the most common starting point and reflects family fairness. By contrast, it can produce difficulties where some children work in the business and others do not. Second, weighted shares reflecting contribution. Importantly, working family members may receive a larger share than non-working ones. Crucially, this needs to be explained carefully to avoid resentment. Third, voting and non-voting shares. Specifically, the working family members may receive voting shares while non-working family members receive non-voting shares with the same economic rights. As a result, control is concentrated in the working family while economic interests are preserved for all. Fourth, ownership through trusts. Importantly, family trusts can hold shares for the benefit of multiple family members. Crucially, the trust structure can provide flexibility and tax efficiency.

For more on the legal framework around ownership transitions, see shareholders’ agreements for family businesses.

The tax dimension

Importantly, the tax dimension of succession planning is significant. Specifically, inheritance tax, capital gains tax and business property relief all affect the cost and the timing of the transition. As a result, succession planning that ignores tax produces inferior outcomes for the family.

In practice, the main tax considerations include the following. First, business property relief. Specifically, this can give 100 per cent relief on the transfer of qualifying business assets for inheritance tax purposes. Importantly, the rules are detailed and the relief is not automatic. Second, capital gains tax on lifetime transfers. Crucially, transfers during the founder’s lifetime may trigger capital gains tax, although holdover relief may be available. Third, the seven-year rule for inheritance tax. Specifically, gifts made more than seven years before death are usually outside the inheritance tax net. As a result, lifetime gifting can be highly tax-efficient if started early enough. Fourth, the use of trusts. Importantly, family trusts can provide both tax and governance benefits. Finally, the structure of the company itself. Specifically, the share structure, the holding company arrangements and the cross-shareholdings between family entities all affect the tax position.

Crucially, families considering succession should take specialist tax advice early. Importantly, the tax planning options that are available with ten years of runway are very different from those available with one year. As a result, early tax planning is one of the highest-return elements of succession planning.

The founder’s role during succession

Importantly, the founder’s role during succession is one of the most sensitive aspects of the process. Specifically, the founder has to step back without disappearing, hand over without abandoning, and provide support without undermining the next generation. Crucially, this is harder than it sounds.

In practice, the founders who handle this best usually do several things. First, they articulate the succession plan clearly and commit to a timetable. Importantly, the timetable should be specific, with named dates and milestones. Second, they identify what they are retiring to, not just what they are retiring from. Specifically, this might be a non-executive role at another business, a philanthropic project, a consultancy, or a deliberate phased retirement. Third, they let the next generation make their own decisions. Crucially, this includes the freedom to make mistakes. By contrast, founders who second-guess every decision the next generation makes typically undermine the succession.

For more on this, see the founder problem.

Dealing with the children who do not take over

Crucially, succession planning has to deal not just with the children who take over but also with those who do not. Specifically, the children who pursue other careers or who are not chosen for leadership still have interests in the family business that need to be respected. Importantly, the way the family handles the non-successor children often determines whether the succession produces a dispute.

In practice, the most effective approaches include the following. First, transparency about the plan. Specifically, the non-successor children should be told what is happening, why, and how their interests will be protected. Importantly, surprise is a major driver of family business disputes. Second, fair treatment in ownership terms. Crucially, the non-successor children may receive shares without working in the business, may be bought out at a fair price, or may receive other family assets in lieu. Third, a meaningful role in family governance. Specifically, the non-successor children should have a voice in the family forum and a continuing connection to the family business. Fourth, respect for the choices they have made. Importantly, the non-successor children have built their own careers and should be recognised for them, not treated as having failed at the family business.

For more on this dynamic, see the passive shareholder and the have and have-not pattern.

The shareholders’ agreement and succession

Importantly, the shareholders’ agreement plays a central role in succession planning. Specifically, the agreement should set out what happens to shares on death, retirement and other events. As a result, the family does not have to negotiate the terms in the middle of an emotional event.

In practice, the most important succession-related provisions in the shareholders’ agreement include the following. First, provisions on what happens to shares on death. Specifically, who can inherit, on what terms, and with what restrictions on subsequent transfer. Second, provisions on retirement of a working family member. Importantly, this includes the question of whether the shares must be transferred on retirement or can be retained. Third, provisions on the founder’s retirement specifically. Crucially, this is the area where the absence of clear provisions produces the most damaging disputes. Fourth, provisions on what happens if a family member becomes incapacitated. Specifically, who can exercise their rights, and on what terms. Finally, provisions on what happens on divorce. Importantly, the shareholders’ agreement should ensure that shares do not pass to former in-laws without the family’s consent.

For the wider framework, see shareholders’ agreements for family businesses.

Common succession planning mistakes

Importantly, certain mistakes recur in family business succession. Specifically, the most common are these.

• First, starting too late. Crucially, succession planning that starts a year or two before the transition is too late to do well.
• Second, treating succession as a single decision. Specifically, succession is a multi-year process with multiple stages. As a result, decisions need to be sequenced rather than all taken at once.
• Third, confusing leadership with ownership. Importantly, these are separate questions and should be addressed separately.
• Fourth, equal ownership without thought. Specifically, equal shares to all children may be the right answer, but it should be a considered choice rather than a default.
• Fifth, ignoring the tax dimension. Crucially, succession without tax planning typically costs the family significantly more than it needed to.
• Sixth, failing to develop the next generation. Importantly, the next generation needs deliberate preparation, not just exposure.
• Seventh, ignoring the non-successor children. By contrast, the way they are treated often determines whether the succession produces a dispute.
• Eighth, the founder failing to retire properly. Specifically, founders who step back but continue to interfere undermine the succession.
• Ninth, no governance structures. Crucially, succession without governance produces disputes because the family has no framework for handling disagreements.
• Finally, doing it in private. Importantly, succession plans that are not shared with the family produce surprise, and surprise produces dispute.

The role of outside advisers in succession

By contrast, succession planning is one of the areas where outside advisers add the most value. Specifically, the family is often too close to the issues to see them clearly. As a result, outside advisers can raise questions that family members cannot. Importantly, the most useful advisers in succession planning include the following.

First, a specialist family business consultant. Specifically, this person works with the family on the soft issues: dynamics, expectations, communication and family decision-making. Second, specialist legal counsel. Importantly, the shareholders’ agreement, the articles of association and the trust deeds need specialist drafting. Crucially, a direct access barrister with family business experience can provide sharp strategic advice alongside the drafting. Third, specialist tax advisers. Specifically, the tax dimension of succession is complex and benefits from expert input. Fourth, an independent non-executive chair or director. Importantly, an experienced non-executive chair can hold the founder to account on succession in a way that family members cannot. For more on this, see the role of the non-executive director. Finally, a family office or trust adviser where the family has these structures.

What succession planning prevents

Crucially, succession planning prevents the most damaging form of family business dispute. Specifically, it prevents the unfair prejudice petitions, the proprietary estoppel claims, the just and equitable winding-up petitions, and the proprietary estoppel claims that arise where the next generation feels misled or excluded. Importantly, the cost of preventing these disputes is a fraction of the cost of resolving them.

By contrast, families that have not planned succession are particularly exposed to dispute at the moment of transition. Specifically, the moment of the founder’s retirement or death is the moment when every unresolved question surfaces. Crucially, where the family has not planned in advance, the questions have to be answered under pressure, often with the parties already aligned against each other. As a result, the cost of late succession planning, whether financial or relational, is usually enormous. For the wider cost picture, see the cost of family business litigation.

Frequently asked questions

When should we start succession planning?

Generally, succession planning should start ten to fifteen years before the founder’s expected retirement. Specifically, this gives the family time to develop the next generation, put governance structures in place, and address the tax planning while the options are wide. Importantly, families that start later usually struggle. By contrast, families that start early have the time to do succession properly rather than under pressure.

Should the eldest child always take over?

No. Specifically, leadership succession should be based on competence and commitment, not birth order. Importantly, the eldest child may or may not be the best candidate to lead the business. As a result, the choice should be made on objective criteria. By contrast, defaulting to the eldest child without considering alternatives often produces poor outcomes both for the business and for the family.

Should ownership be split equally between children?

It depends. Specifically, equal ownership reflects family fairness and is the most common starting point. By contrast, it can produce difficulties where some children work in the business and others do not. As a result, families often use mechanisms such as voting and non-voting shares, family trusts, or other family assets in lieu, to balance family fairness with the practical needs of the business. Importantly, the right answer depends on the specific circumstances.

What happens if no family member wants to take over the business?

Specifically, the family has several options. First, a non-family leader can be appointed while the family retains ownership. Second, the business can be sold to an external buyer. Third, the business can be sold to its management through a management buyout. Fourth, the business can be wound down. Importantly, the decision should be made on a planned basis rather than under pressure. As a result, families that have considered the possibility of no internal successor well in advance usually achieve a better outcome than those that face the question for the first time at the moment of transition.

What is the most important thing in succession planning?

In short, the most important thing is to start early and to be explicit. Specifically, families that document the succession plan clearly and share it with all relevant family members typically avoid most of the disputes that succession produces. By contrast, families that leave succession ambiguous, or that fail to communicate the plan, typically face the most damaging disputes when the transition happens. Crucially, ambiguity and surprise are the two main drivers of succession disputes.

Further reading on this site

• Family Business Disputes (main page)
• The Three Circles Model
• The Common Causes of Family Business Disputes
• The Founder Problem
• The Next Generation
• The Passive Shareholder
• Shareholders’ Agreements
• Family Constitutions and Family Forums
• The Role of the Non-Executive Director
• Family Business Disputes After a Death
• Preventing Family Business Disputes
• Direct Access Barrister

Get advice on your situation

Succession planning is the single most important investment a family business can make in its own future. Specifically, good succession planning prevents the most damaging form of family business dispute. As a result, early specialist advice on succession is one of the most valuable investments you can make. I act as a direct access barrister, commercial mediator and mediation advocate in family business disputes throughout England and Wales.

Call 020 4538 0246, use the contact form, or book a call directly. In addition, my book Winning in Family Business Disputes (forthcoming) covers succession planning in detail, alongside my published works on shareholder disputes and commercial mediation. Organisations like Family Business United also publish useful guidance for family business owners.

Important disclaimer: This page is provided for general information purposes only and does not constitute legal advice. The content may not be legally accurate for your situation or at all. You must not rely on anything on this page in respect of your legal rights. Before taking or refraining from taking any legal action, you should seek advice from a qualified lawyer. I disclaim any and all liability for any loss, damage or expense howsoever caused by reliance on the contents of this page. If you would like advice on your specific situation, contact me here.