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Succession planning: the legal view

Not planning properly for succession at the top of your business could not only cause costly and damaging disputes among those left in charge, but could also seriously hamper the value of your business in the event of a sale.

Good and stable management in any business is what ultimately drives shareholder value and this is as true in the construction sector as in any other. 

It is vital for the success of any business that it not only retains a strong management team but also has a clear management succession plan in place.

Many businesses are owned by a small number of shareholders who also manage the business. They may even all be from the same family.

Whether it is intended to keep the business or to eventually exit through a sale, a management succession plan is vital.

Identifying future leaders

Family businesses must identify the most suitable and willing people in each generation to take the business forward.

“The value of a business will be significantly reduced if the buyer cannot rely on continuity of management”

It is crucial the relevant personal estate planning structures (eg appropriate wills and/or family trusts) are then put in place to facilitate these arrangements and to limit the potential for costly and damaging disputes after death.

Where an exit is planned through a sale then a new management team that is ready to step into the shoes of the exiting shareholder managers will need to be identified well in advance of going to market.

Effect on value

The value of a business will be significantly reduced if the buyer cannot rely on continuity of management. In a worst-case scenario, it can even make the business virtually unsaleable, even if it is performing strongly.

The only option for the shareholder managers in such circumstances may be to agree to stay in post after the sale until a new management team can be put in place, but this would almost certainly result in the buyer seeking contingent payment provisions (including deferred payments and earn-out arrangements linked to performance) during the intervening period.

This would not provide the sellers with a clean exit; it may also prejudice their ability to extract maximum value from the sale process.

Proper incentivisation

Management teams need to be properly incentivised to perform where they are not themselves significant stakeholders.

This can be done through various management incentives including bonus and share option schemes (for example, tax-efficient Enterprise Management Incentive arrangements) and these should always be considered.

If business owners attend properly to management succession and personal estate planning, they will have done all they can to ensure the business will endure and that an exit for maximum value is possible at the most desirable time.

Tim Ball is a partner in the corporate finance team at Speechly Bircham

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